The 1.2 Million Bpd Outage That Oil Markets Are Completely Ignoring

General Khalifa Haftar has shut off more than half of Libya’s oil exports, and the National Oil Company (NOC) has declared force majeure, taking a whopping 800,000 barrels per day of crude offline for export, and costing the country some $55 million in lost revenues daily.

And now, with the country’s entire 1.2 million bpd in production facing a complete shutdown, the market remains confused as to just how much oil is already offline.

According to the NOC, four key ports - Hariga, Brega, Sidra and Ras Lanuf - are closed and under force majeure as of 18 January.

What that means is that once these ports reach their storage capacity, which is limited, the NOC will have to shut down crude oil production.

Right now, the NOC is reducing crude oil production rates to avoid a total shutdown of production. A total shutdown would take all 1.2 million bpd offline and cost the country $77 million a day.

Adding to the chaos of Haftar’s closure of ports, the PFG closed the valves in the Hamada pumping station on January 19th, prompting the NOC to declare force majeure there as well, and shut down production from the giant Sharara and El Feel oilfields. This means that the key Bari power plant will run out of stock soon and be forced to shut down.

So why are oil prices not responding?

The NOC declared force majeure on Friday, January 18th. The oil price response when the markets opened on Monday, January 20th, was muted, both by geopolitical numbness and by a U.S. holiday (Martin Luther King Day), which meant no regular trading or settlements in New York for oil.

WTI crude futures for January delivery gained 59 cents (1%), hitting $59.17 per barrel, while March Brent oil futures gained 65 cents (also 1%), climbing at a snail’s pace to $65.50 per barrel.
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But even that tiny boost was short-lived. On Tuesday, WTI closed at $58.34, and by mid-day Wednesday, it was trading down further.

Brent closed Tuesday at $64.59, and Wednesday was hovering at around the $62 mark.

Again, it’s because of U.S. output, which has definitively numbed the markets against the prospect of taking another country’s oil offline - even, apparently, Libya’s entire 1.2 million bpd of production.

The analysts have, indeed, spoken:

Bank ING: “Market participants appear to fret less about supply disruptions in the Middle East, or at least the risk of disruptions, thanks to the impressive growth we have seen in U.S. output over recent years.”

INTL FCStone senior risk manager Brayton Tom: “At the end of the day spare capacity is abundant in the region.”

Investing.com senior commodities analyst Barani Krishnan: “About 95 percent of Libya’s oil supply could be at risk, yet crude traders are barely alarmed, underscoring the market’s bigger worries over the mammoth recent builds in U.S. fuel supplies.”

Vance Scot, AlixPartners LLP, by way of Rigzone: “[M]arkets seemed to recognize that available OPEC surplus capacity and the U.S. export capability driven from continued Permian growth can likely absorb potential Libyan and Iraqi disruptions …”

The fact is that even if Libya shutters its entire 1.2 million bpd, OPEC can offset the supply disruption with a spare 3 million bpd of capacity, so the impact would be limited.

And even without considering OPEC’s ability to immediately soften any blow Libya can deliver, two weeks of high inventory builds of U.S. gasoline and distillates remain the fundamentals that direct traders.

This is no longer about geopolitics. Oil prices are only driven for any length of time by supply and demand fundamentals, and those fundamentals are solidly based on U.S. production for the foreseeable future.

Not an attack on Saudi Aramco facilities; not even the very public U.S. assassination of an Iranian general on Iraqi soil and the prospect of an all-out war will move the needle right now.

If it’s not about the Permian, it’s not driving any significant or sustainable movement in oil prices.

The only feasible thing that could boost oil prices right now - for more than a day - is a sustained uptick in demand on the back of economic growth.

For analysts in the realm of geopolitics, it poses an interesting conundrum: Oil is no longer a marketable weapon. That also means that Haftar’s oil play may buy him $77 million a day in leverage over the Government of National Accord (GNA) in Tripoli and its allies, but on a global scale, the days are over when the entire world jumps in to stop the disruption.

By Julianne Geiger for Oilprice.com