Energy experts worldwide are increasingly concerned about the ongoing oil shutdown in Libya, a key member of OPEC.
Libya’s daily oil output fell by more than half in the past week to about 450,000 barrels after eastern authorities ordered a shutdown in response to a decision by the internationally recognized Western government based in the capital, Tripoli, to replace Governor Sadiq Al-Kabir.
This disruption has raised uncertainty over whether major oil producers will gradually pare back voluntary crude production cuts as planned starting on October 1.
OPEC already implemented plans for members to make up for existing shortfalls by producing more oil than they were supposed to under quota restrictions.
At this stage, it’s “more likely than not” that OPEC+ will stick to plan A—”follow through with its stated intention to gradually raise production from October,” said David Oxley, chief climate and commodities economist at Capital Economics, in a note dated Friday. “This is a key reason why we forecast oil to fall to $70 [per barrel] by end-2025.”
In June, the group known as OPEC+ said that a round of voluntary cuts totaling 2.2 million barrels per day, including a reduction of 1 million bpd by Saudi Arabia, would then be restored gradually, on a monthly basis, from the fourth quarter to the end of 2025. It also said, at the time, that the phaseout can be stopped or reversed depending on market developments.
The latest market development, involving Libya, may have actually reinforced the idea that a gradual increase in production is warranted to ensure supply and demand balance in the market.
On the face of it, the unexpected loss of oil production from Libya this week “could seal the deal” for OPEC+, said Oxley.
On Monday, Libya’s eastern government, which is supported by warlord Kahlifa Haftar, commander of the Libyan National Army, reportedly said it was shutting down all oil fields under its control and halting crude production and exports until further notice.
In 2023, Libya produced 1.189 million bpd and exported 1.024 million bpd, according to OPEC data, but so far, news reports have pegged the production loss at closer to 700,000.
History shows that Libya’s oil production has “bounced back quickly after the numerous disruptions seen in the past,” said Oxley. “And for what it’s worth, oil prices have not ratcheted upwards in response to the latest disruption—but rather continued to trade in a range around our end-year forecast of $80 [per barrel] over the past month or so.”
“Aside from the evolving geopolitical risks, mounting signs of weaker-than-expected oil demand, particularly in China, could also give the cartel reason to pause for thought before adding more to global supply,” Oxley said.
‘OPEC+ is unlikely to be in a rush to commit to a course of action and will probably keep us all guessing for a while to come.’ David Oxley, Capital Economics
Against this backdrop, “OPEC+ is unlikely to be in a rush to commit to a course of action and will probably keep us all guessing for a while to come,” he said.
The disruption in Libya could have significant implications for Nigeria, whose economy is heavily reliant on oil exports.
“A decline in demand could translate to lower oil prices and, consequently, reduced government revenue. This could put pressure on the country’s budget and potentially lead to cuts in public services and infrastructure spending,” Aisha Mohammed, an energy analyst at the Lagos-based Center for Development Studies, said.
The government has based its 2024 budget on the expectation that oil prices will exceed $78 per barrel and Nigeria will produce at least 1.78 million barrels per day (bpd).
