- Libya’s giant El Sharara oilfield has been shut down.
- 300,000 barrels per day of oil production is at risk because of one landlord. How is this possible and what does this mean to investors?
- This time may be different.
In October, I published Not All Oil Producers Are Created Equal, in which I discussed in detail the volatility of Libya's oil supply:
The oil production in this country can swing by more than 500,000 barrels per day in just a few months, which makes predicting Libya's oil supply, and therefore the global oil supply, very difficult.
Just a week ago, the National Oil Corporation had declared force majeure on the 70,000 bpd El Feel after a protest by guards closed the field, and this morning, Reuters reported that Libya’s giant El Sharara oilfield has been shut down because a landlord closed a valve in protest against pollution near a pipeline crossing his land.
How can a landlord have such an impact on the world's oil supply?!
The following is a Twitter exchange that briefly discusses the topic:
I presume that Mr. Mohamed is guessing that the disruption will last for only a few "days," but that's besides the point.
The primary takeaway here for oil and oil equities investors is how fragile oil supply can be in certain parts of the world, such as Libya, Nigeria, or even the Middle East.
This Time May Be Different
Long gone are the days that oil supply disruptions passed us by without impacting oil prices, because the "oil glut" has all but disappeared:
According to OPEC's latest monthly oil market report, total OECD commercial oil stocks fell in December to 2,888 mb, or 109 mb above the latest five-year average. From December through January, weekly oil inventory reports continued to show large total oil inventory declines, which means total OECD commercial oil stocks may already be at or near the five-year average.
Regardless whether the current disruption of 300,000 barrels per day lasts for a few "days" or weeks, one thing is for certain: some countries are more volatile than others, and this observation should be incorporated in oil supply forecasts.
When I think about oil supply from Libya and Nigeria, I also keep in mind the risk of frequent disruptions. The best method that I can think of how to incorporate fragile supply from volatile countries is by assigning a risk factor, such as incorporating a 10% to 20% haircut to supply capacity forecasts.
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