Supply-Demand Equation

The factors at play for oil in the short and long term.

Oil prices have surged over the initial trading days of this week as reports emerged of halts in Libyan production due to political disputes between the country’s two governments.

Brent and crude were up 3% and 3.5% on Monday. In Tuesday’s trading, the prices cooled and reset.

There were also heightened tensions in the Middle East as Israel’s military conducted a series of airstrikes in southern Lebanon on Sunday, sparking concerns about escalating regional tensions.

While the Libyan news has been the main driver of price this week, the weekend events remind us just how volatile the situation is in the Middle East, and maybe markets are downplaying the risks that are present.

Force Majeure

The Republic of Libya currently exports approximately 1 million barrels of crude oil per day, primarily from production facilities in the eastern part of the country.

Recently, the eastern government, which lacks international recognition, announced its decision to halt all oil production and exports, calling a “force majeure” that applies to all fields, terminals and oil facilities. This is part of a flare-up in tension over the central bank’s leadership, which has Sadiq al-Kabir as its governor (backed by the East-based parliament).

The central bank oversees substantial oil revenue, which constitutes Libya’s primary source of income. Kabir is refusing to step down under pressure from Abdul Hamid Dbeibeh, prime minister of the Tripoli-based government in the West.

We are sharing the political background to illustrate Libya’s complexities. This situation underscores the multiplex and intertwined nature of Libya’s political and economic dynamics, which are heavily dependent on oil.

Although the Western government have taken control of the CB premises, they need recognition by foreign partners of the new leadership as legitimate, and that depends on domestic acceptance of this change. Right now, foreign parties are viewing this takeover as illegal.

The oil market’s supply implications are that real barrels of oil will be lost in these tensions, not just forecasted supply figures. How long the situation will continue is much harder to say (and by no means are we Libyan political experts to make a guess).

And The Rest…

Before going onto all of the factors at play in the supply-demand situation for oil, what is happening concurrently elsewhere in the Middle East?