New Major Downside Risk To Oil: Libyan Truce

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Includes: DBO, DNO, DWTI, OIL, OLEM, OLO, SCO, SZO, TWTI, UCO, USL, UWTI
by: Douglas Ryan

Summary

Markets are hypersensitive to minor changes in forecasts (OPEC/IEA reports).

Iraq looks to increase oil output substantially again for 2nd month in a row.

Substantial risk factor to oil price: Libyan truce announced late last week.

In this series of articles, I have pointed out the similarities of the oil price decline and potential for recovery with the oil price collapse and recovery of 2008/9, what factors could delay a recovery and, based on the latest data, the approximate time-frame for production to peak in the United States and its impact on a date for the bottoming of oil prices.

Hypersensitive Oil Markets

The oil market has been hypersensitive lately. Last week, on Thursday, OPEC announced that it believed that the amount of OPEC oil needed to balance the market in 2015 would be 100,000 barrels per day less than previously forecast. Over the course of one year, that equates to under 40 million barrels, less than 12 hours of worldwide demand. The price of the near term Brent futures declined by 2.1 %.

On Friday, the IEA published a report on its projections for the oil market. According to secondary reports (the actual report is not made public for 2 weeks), the IEA reduced its forecast for non-OPEC oil by 350,000 bpd for 2015 from December. (No change in expected demand). Over the course of one year, that equates to roughly 127 million barrels, just under 36 hours of worldwide demand. The price of the near term Brent futures increased by 5.2%.

Middle East/North Africa

Barely mentioned in the media, recent events in the Middle East and North Africa present a major downside risk to the price of oil.

Monday (Jan. 19, 2015) Bloomberg quoted the Iraqi oil minister saying that Iraq is pumping 4 million barrels a day. If true, that is an increase of almost 400,000 barrels a day from the numbers OPEC reported in December, which in turn were just under 300,000 bpd above November's. Oil prices were down yesterday (Jan. 20, 2015).

But far more ominous for oil prices is that a truce has been declared in Libya's civil war. Returning Libyan oil production to 2012 levels adds just under 1 million barrels a day. In the course of a year, this would add 3 days to supply and have a major depressive effect on the price of oil.

Current Libyan production has been depressed because of the Libyan civil war and could be quickly restored.

According to the US Energy Information Agency, the Libyan National Oil Corporation claimed in 2011 that an additional 775,000 bpd can be extracted through the use of enhanced oil recovery techniques at maturing oil fields. What is the break-even price for the use of these techniques is not known.

Of course, geo-political surprises can go the other direction as well. But the announcement of the truce suggests purchasing downside protection if you are net bullish on oil.

Chart sources: OPEC Monthly Report (Jan. 2015) / US EIA

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.