Oil Rallies on Libyan Supply Outage Ahead of OPEC+ Meeting

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the first trading session of 2022 higher, propelled by expectations for the Organization of the Petroleum Exporting Countries in consortium with Russia-led partners to agree to stay on course with a gradual production increase next month, even as a number of smaller producers continue to struggle in raising output in line with agreed-to quotas amid ailing infrastructure and political turmoil.

Monday's higher settlements in the oil complex follow unplanned supply outages in Libya and Ecuador among other producer nations that have arguably made the decision for OPEC+ to raise output in measured steps next month even easier. Libya, in particular, has recently seen its oil production drop sharply, with over 300,000 barrels per day (bpd) from the country's largest oil field at Sharara shut-in by an insurgency and another 200,000 bpd shut-in over the weekend due to a leaking pipeline that carries crude to the nation's crude oil terminal El Sider. Combined, these closures have reduced Libyan oil production to about 700,000 bpd -- the lowest in more than a year.

Libya's National Oil Company (NOC) estimates it could take up to a week to repair the damaged pipeline, while warning "the leak is the consequence of illegal closures in the past year."

NOC has declared force majeure a number of times over the course of 2021 due to insurrection in the eastern provinces that have targeted oil infrastructure for political gains.

In Ecuador, the government of President Guillero Lasso declared force majeure on all of its oil contracts last month due to the shutdown of the nation's two pipelines that carry crude across the Andes. The closures were triggered by ongoing river erosion in the Amazon region, with the troubled oil producer having made three force majeure declarations in 2021.

On Monday, the government claimed to have partially resumed operations on the 360,000 bpd SOTE crude pipeline and 450,000 bpd OCP pipeline with the goal to resume oil production to its pre-crisis level next month. Oil traders are rightfully skeptical that the river erosion that has plagued the nation for over a decade would get resolved as quickly as promised.

Technical panel for OPEC+ estimates market surpluses in the first quarter would be about 25% smaller than previously thought due, in part, to ongoing challenges by smaller producers. Against this backdrop, OPEC+ is expected to agree to a 400,000-bpd production increase for February when the group meets via videoconference on Tuesday, Jan. 4.

Controlled incremental increases in OPEC+ production underpinned support for oil prices throughout 2021 despite continued flare-ups in coronavirus infections. OPEC+ is once again meeting as another COVID-19 surge in infections is taking place, led by the omicron variant.

Travel restrictions and lockdowns imposed across Europe and in parts of Asia, as well as record new coronavirus infections in the United States do not bode well for fuel consumption, especially for jet fuel. U.S. airlines cancelled more than 2,000 flights on Saturday and Sunday, bringing the total cancellations over the past ten days to nearly 14,000 due to shortfalls in staffing crews and severe winter weather in parts of the country. Flight data published by the Transportation Security Administration showed 1,616,316 passengers passed through TSA checkpoints at domestic airports on the first day of 2022 -- about 30% below pre-pandemic levels.

Separately, OPEC on Monday appointed a veteran of the Kuwait Petroleum Corporation and a former chair of Kuwait's OPEC membership, Haitham Al-Ghais, as the new Secretary General for a three-year period, which takes effect on Aug. 1. Al-Ghais currently serves as Deputy Managing Director for International Marketing at KPC. He Chaired the Joint Technical Committee of the Declaration of Cooperation in 2017 and subsequently served as a Member of the JTC until June 2021.

On the session, West Texas Intermediate February futures advanced $0.87 to $76.08 barrel (bbl) and March Brent rallied $1.20 to settle a tad below $79 bbl. NYMEX February RBOB futures surged 3.19 cents for a $2.2565 gallon settlement, with the front-month ULSD contract finishing at $2.3574 gallon, 3.21 cents higher on the session.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges