Oil Futures Waver After Libyan Crisis Spurs Relief Rally

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent crude contract on the Intercontinental Exchange were little changed early Wednesday after Tuesday's relief rally following Monday's selloff to two-week lows. The market is grappling with the prospect of less oil demand amid reaction to spiking omicron cases, an energy crisis in Europe and geopolitical flareups that could endure.

A force majeure declaration by Libya's National Oil Company on Monday staved off a selloff sparked by increasing mobility restrictions in Europe in response to surging COVID infections, with the omicron variant found to infect at a rate 5.41 times higher than for the delta variant and to evade current vaccines, according to a Dec. 16 report from the Imperial College COVID-19 response team. Centers for Disease Control and Prevention on Monday said the omicron variant now accounts for 73% of new U.S. COVID cases, with the World Health Organization reporting that the new variant has been found in 43 states in nearly 90 countries globally.

The International Energy Agency earlier this month cut its global oil demand outlook by 100,000 barrels per day (bpd) for both 2021 and 2022 because of surging COVID cases, noting in particular that a recovery in jet fuel demand would be most hobbled. Travel restrictions proliferate through Europe.

Yet political discontent in Libya leading up to planned presidential elections in the north African nation on Friday (12/24) sparked a force majeure on the country's oil exports in the west after the Petroleum Facilities Guard militia, which protects the countries oil fields and pipelines, was ordered to shut-in four oil fields in western Libya. They include, according to multiple reports, the El Feel, Wafa, Hamada, and El Sharara oil fields, with El Sharara Libya's largest oilfield having a 300,000 bpd production capacity.

The decision to shut the oil fields took place amid contention between Mustafa Sanalla, the head of the Libyan Oil Corporation, and Akakus Oil Operations, a joint venture including NOC, Repsol, OMV, Equinor and TotalEnergies. Akakus Oil operates El Sharara.

The shut-in oil fields deny oil flow to the Mellitah and Zawiyah ports situated near Tripoli, prompting force majeure on exports from these terminals. Mellitah has a 90,000 bpd oil export capacity and Zawiyah has a maximum 250,000 bpd refining and export capacity.

A political crisis in Libya could erupt beyond Monday's actions, with Friday's presidential elections postponed in an effort to find common ground between an interim government and rivals including Saif al-Islam Gaddafi, the son of Muammar Gaddafi who ruled Libya for decades, and military leader Khalifa Haftar, who commands eastern Libya and had attacked Tripoli before agreeing to a truce. Should presidential elections move forward without the various parties agreeing on conditions in establishing the vote, fighting between various factions could erupt, according to Reuters. Establishing a president in Libya through popular vote is seen as the only solution to bringing some harmony to the OPEC nation.

An extended force majeure will already reduce expected global oil restocking in 2022, with IEA forecasting supply to outpace demand by 1.7 million bpd in the first quarter and 2 million bpd in the second quarter. A widening conflict in Libya that cuts off more exports would tighten the oil-demand balance against expectations, with Libyan oil production having averaged 1.14 million bpd in November, according to the most recent data available.

Separately, natural gas and electricity prices in Europe are again reaching record highs as another cold front descends on parts of the continent with gas reserves low and Russian oil flow running below its historic rate. Russia accounts for 35% to 40% of Europe's gas supply.

Critics say Russia is willfully holding back gas supply, which it denies. Overnight, Russian President Vladimir Putin said the West has taken an "aggressive line" regarding Ukraine that could force Moscow to make a tough response, according to Reuters. Putin said Russia has nowhere to run, noting Ukraine sits at its border. While rejecting accusations from Ukraine and the United States that Russia is planning an invasion of Ukraine, Moscow has amassed tens of thousands of troops at the border.

Heated rhetoric between the West and Russia creates uncertainty for stable gas flows to Europe. Washington is promising stiff sanctions on Moscow should it invade Ukraine, which could lead Moscow to cut gas supply to Europe.

NYMEX February West Texas Intermediate futures were little changed at $71.20 barrel (bbl), and ICE February Brent was trading near $74 bbl. NYMEX January ULSD futures were flat at $2.2580 gallon, and the January RBOB contract softened to $2.1450 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne