WTI’s big day yesterday was driven by the reports that a Libya oil pipeline explosion caused a shut in of 70,000 to 100, 000 b/d. What caught our attention were the AP and Reuters reports that the explosion was not an accident but rather a deliberate attack. The AP report notes it was ISIS. It reminds that geopolitical risk may not be gone in Libya and will at least add risk that there could be a return to some of Libya’s prior issues that impacted its oil production levels and its ability to maintain its current ~1 million b/d thru H1/17 in the run up to the OPEC June meeting. If Libya can’t sustain its production, it will help support the math to providing visibility to eliminating the oil oversupply in H2/18 and allow for some start of the exit of cuts in H2/18. But perhaps even more than Libya’s pipeline explosion impact on the math for oil supply reduction, it reminds that geopolitical risk is likely to be a big factor to oil and OPEC in 2018.
AP says Libya oil pipeline explosion was ISIS terrorism, not an accident. We couldn’t’ help but look to see what others were saying after watching last night’s Bloomberg TV opening of Asian markets that highlighted how the Libya oil pipeline explosion drove WTI up $1.31 to close at $59.78 in US markets, the highest oil price since 2015. Bloomberg did not give any cause for the explosion. This was consistent with their online reporting [LINK] that “Libya’s oil industry revival suffered a setback Tuesday after an explosion at a pipeline carrying crude to the OPEC nation’s biggest export terminal. Oil rallied. Production will drop by 70,000 to 100,000 barrels a day after the explosion, the state-run National Oil Corp. said in a statement.” Reuters reported [LINK] that the explosion was deliberately caused by armed men, reporting “Armed men blew up a pipeline pumping crude oil to Es Sider port on Tuesday, cutting Libya’s output by up to 100,000 barrels per day (bpd), military and oil sources said. The state-run National Oil Corporation (NOC) said in statement output had been reduced by 70,000-100,000 bpd. The cause of the blast was unclear, it added. The attackers arrived at the site near Marada in two cars and planted explosives on the pipeline, a military source said.” An-Nahar (a news site in Lebanon) reported [LINK] on the AP story “Militants attack oil pipeline in eastern Libya. A Libyan official said militants have bombed a pipeline pumping crude oil to the port of Sidr. Col. Muftah Amgharief, from the security force guarding oil facilities in eastern Libya, said Tuesday’s bombing appeared to have been carried out by the Islamic State group, which is active in the area. He says the attack could reduce Libya’s oil production by up to 100,000 barrels a day.”
The cause of the explosion is very important with potentially bigger implications to Libya’s oil production and therefore oil prices in the lead up to OPEC’s June meeting. We probably would have just waited to include this item in our upcoming Dec 31, 2017 Energy Tidbits memo if the explosion was due to an accident as it would just point to a relatively straightforward fix the pipeline and oil will be flowing again shortly. However, if AP reporting is correct, we believe this Libya oil interruption will be viewed more seriously or at least cause markets to pause and wonder if this is a sign of increasing domestic terrorism that can upset the strong and stable Libya oil production performance in the past five months. This stable production has kept the reported increased ISIS efforts (and the efforts to stop them) under the radar. Yesterday’s pipeline explosion will bring ISIS back into the spotlight.
Libya’s oil production has been strong and stable at or just below 1 million b/d for the last five months. Up until this summer, Libya’s oil production had been hit by ongoing domestic tribeal fights for turf and ISIS attacks. That changed, and Libya’s strong and stable oil production since July has been a capping factor on oil prices for two reasons. First, it has been at or just below 1 million b/d for the past five months, effectively ~0.4 million b/d higher than its April oil production of 0.582 million b/d. Second, there has been the general expectation that the major tribal fights or ISIS impact had been effectively reduced so that a 1 million b/d production level could be maintained. The risk (or upside to oil) is that a return of ISIS risk or other factors pull back on the volume and the potential to maintain ~1 million b/d going into the OPEC June meeting. Below is the Libya production data from the most recent OPEC MOMR Dec 2017
OPEC Production (Per Secondary Sources)
Source: OPEC
Any pullback from Libya’s current ~1 million b/d would help the math for OPEC’s decision on when and how to exit its cuts. Pipeline repairs are normally straightforward repairs and can be done in a short period. What can make a difference is if this means that there is a return to some of Libya’s prior issues that impacted it oil production levels and its ability to maintain its ~1 million b/d for H1/17 in the run up to the OPEC June meeting. This is the key meeting when OPEC will be figuring out what to do, if anything, on when and how to exit the cuts. If Libya falls back 100,000 b/d from its current production levels, this is 3 million barrels per month. . It may not seem to be much, but it would be 18 million barrels by the time of the OPEC June meeting. It would help support the math for the argument that there is visibility to eliminate the oil surplus in H2/18 and allow for some start of the exit of cuts in H2/18. Last week, Russia oil minister Novak [LINK] said “There is a consensus among the (oil) ministers that we should avoid oversupply on the market when exiting the deal” and that “The detailed parameters will be discussed by the time we approach the balance. There could be different time frames, depending on forecasts of supply and demand increase on the global markets”. Our view is unchanged on how to avoid this timing issue to avoid adding to oversupply – its really a “when” question and that the logic to exiting the deal at Dec 31, 2018 doesn’t hold as oil demand drops seasonally every year in Q1. If they exit the deal at Dec 31, they will inevitably add to the oversupply. This was the basis for our Dec 5, 2017 blog “The Only Logical Time For OPEC To Start To Unwind The Cuts Is In July To Avoid Recreating A Surplus Problem” [LINK].
But perhaps most of all, Libya’s oil pipeline attack reminds that geopolitical risk is likely a big factor to oil and OPEC in 2018.. We recognize that this is Libya, but it hasn’t been the only recent geopolitical risk area in the news. Saudi Arabia’s domestic terrorist attacks in its eastern province are much less in H2/17, but not gone away. But that isn’t the case for the Houthis. Markets looked thru the most recent Dec 19 Houthis long range missile attack on Riyadh because Saudi Arabia said its patriot defense system successfully shot down the missile on the outskirts of Riyadh, as it also did on the Nov 4 long range missile attack on Riyadh. However, it seems clear that Saudi Arabia is taking the Houthis long range missile attacks as evidenced by the dramatic escalation of air sorties on the Houthis post Dec 19 as Saudi Arabia moves to eliminate future long range missile risk. Until the Houthis long range missile capability is eliminated, it poses a major potential threat to Saudi Arabia oil infrastructure with its now proven capability to reach Saudi Arabia’s major oil infrastructure and fields, as well as its capital. Markets will be watching if Libya can maintain its strong ~1 million b/d of the last five months and how that affects the math for OPEC’s review of how and when to exit its cuts. But the bigger reminder for oil markets today is that geopolitical risk is likely a key issue for oil prices and OPEC in 2018.