End game in Libya could herald oil slump

August 22, 2011

By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The end game in Libya could herald an oil price slump. Like the rebel advance into Tripoli, Libyan supplies to the global market could come sooner than expected. Brent has slipped by almost $3 to almost $106 per barrel in a matter of hours. A resolution in Libya, coupled with concerns over global growth, means tight markets could soon look oversupplied.

A return of Libyan oil production to pre-unrest levels of 1.7 million barrels per day, or 2 percent of global supply, would take until 2015, according to a June estimate of the International Energy Agency. The forecast may now look too pessimistic, with the rebel-controlled Arabian Gulf Oil Co., Spain’s Repsol, and Italy’s all suggesting normal supply could resume much faster once the crisis is resolved. Analysts reckon production could reach up to 1 mbpd within a year.

Oil prices have already eased almost $20 per barrel in four months. A supply increase, just as the U.S. and European economies look vulnerable to a new recession, will further weigh on prices. And Saudi Arabia’s recent effort to offset the disruption from Libya, taking production to a record high of almost 10 mbpd, will inadvertently act to compound any supply glut, as will the IEA release of emergency reserves.

Yet any price slump is likely to be much less severe than in 2008, when oil prices crashed by more than $100 per barrel in six months. This time around, credit lines remain open to businesses. And oil demand remains strong from non-OECD countries like China, which now account for almost 50 percent of the total compared to 44 percent in 2008, according to Barclays Capital.

Politics will further support prices. Investors remain alert for any signs that the protest movement could yet spread to larger oil producers, namely Iran. And even if prices do continue to fall, high-spending Gulf oil countries have a big incentive to cut production quicker than before. Saudi Arabia needs roughly $84 per barrel to break even compared to around $50 per barrel three years ago. But with Brent prices some way off the pain threshold for producers, there’s still room for a significant adjustment.

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