The Biggest Catalyst In Oil Markets Is Going Unnoticed
Oil prices have fallen sharply on fears of a global economic slowdown, but the markets are overlooking the possibility of a serious outage in Libya as civil war drags on.
It may be hard to maintain attention to any one conflict, with so many now raging around the world. Last week, the Trump administration was all-in on Venezuela. But with the coup failing, Washington has turned its sights on Iran.
However, more than a month after the Libyan National Army (LNA) assaulted Tripoli, defying the UN and the international community, the fighting continues. The head of the militia, Khalifa Haftar, had hoped for a swift conquest, but instead has run into a stalemate. “Despite the advantage of access to high-tech munitions seemingly supplied in violation of the UN arms embargo on Libya, the LNA does not seem to have the strategy, logistics or manpower sufficient to defeat the GNA and the various western-Libya militia that are supporting it against Haftar,” Standard Chartered wrote in a report. The GNA refers to the Government of National Accord, the internationally-recognized government in Tripoli.
As of now, the humanitarian crisis is growing worse. Hundreds of people have been killed and more than 60,000 have fled. The World Health Organization is sounding the alarm on a shortage of medical supplies, and the potential for a cholera outbreak as violence continues in the country.
The longer the war lasts, the more likely the country’s oil flows will breakdown. “As Chairman of the Libyan National Oil Corp., I cannot foresee any scenario, other than an immediate ceasefire, in which Libya’s oil exports are not severely impacted by the conflict,” Mustafa Sanalla, head of Libya’s National Oil Corp., wrote in an op-ed for Bloomberg Opinion.
In fact, he says that the fighting has already impacted Libya’s oil sector. On April 10, a bomb hit one of the NOC’s oil facilities outside of Tripoli, sparking a fire. Meanwhile, oil fields in the country’s south are experiencing shortages, Sanalla said. The fields need fuel and other supplies in order to maintain operations. An oil worker was abducted near Sirte, while others have suffered from threats. The assault takes a toll on the workforce.
The LNA has even seized an airport at one of the NOC’s oil export terminals, and the militia has tried to commandeer vessels in order to use them in the military campaign. “While we are as determined as ever to oppose attempts to depict NOC as partisan in this conflict, we are in no position to resist this sort of military pressure,” Sanalla warned.
But it gets worse. Sanalla said that the NOC’s oil has begun to be sold illegally. If various factions begin funding their operations from the illicit sale of oil, civil war and instability may only grow worse. With the LNA and GNA at war, ISIS militants can regroup and strengthen, Sanalla said.
U.S. President Trump’s about-face has arguably made things much worse. The policy of the U.S. government had been to support diplomatic negotiations, and Washington has gone to lengths to avoid picking sides. Trump, out of nowhere, lent his support to Haftar’s assault on Tripoli after taking a phone call with him. That has muddled the international response to the fighting and granted a sense of legitimacy to the LNA’s attack on Tripoli. Ultimately, reconciliation, or even a cease-fire, has become increasingly unlikely.
Ultimately, Libya’s success at restoring oil production to over 1 million barrels per day (mb/d) – and reaching a multi-year high of 1.26 mb/d in March – rested on the fact that neither side had control over Libya’s oil system. Sanalla said that this “dual-key” approach was critical – an arrangement in which the LNA guaranteed security at ports and oil fields, and the GNA held a monopoly on the legal authority over oil exports. With those powers divided, neither side could seize control of the entire system. If the GNA tried to withhold payments to east of the country, the LNA could block the ports. If the LNA tried to export oil on its own, the GNA could withhold payments.
The civil war puts the entire system at risk. “[W]e think it unlikely that the arrangement can survive a protracted stalemate and the associated weakening of the LNA,” Standard Chartered wrote in its report. “In our view there is a high risk that Libyan outages could add another 1mb/d loss to the 1.9mb/d y/y reduction from Iran and Venezuela.”
The latest concern for oil traders is the dramatic escalation of the U.S.-China trade war, and for good reason. But while the global economy could be hit with a trade shock, the physical market for crude is tight…and in danger of more disruptions.
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