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Libyan exports add additional downward pressure to Brent

Hydrocarbon Engineering,

Libya has substantially ramped up its oil production in recent months, with output averaging above 900 000 bpd in October, according to the National Oil Corporation (NOC). The increase in production has also supported a strong recovery in oil exports, reaching 18.05 million bbls in September, up from approximately 16 million bbls in August.

Business Monitor International (BMI) reported that according to OPEC data, Libyan crude production averaged 780 000 bpd for September; crude exports stood at 476 700 bpd. Of the 303 300 bpd that was not exported, BMI estimates approximately 115 000 bpd was refined domestically, and most of the remainder put in storage.

Libya has nameplate refining capacity of 378 000 bpd. However, as of end of September the 220 000 bpd Ras Lanuf refinery had yet to restart production. Damage to storage tanks had also brought the 120 000 bpd Zawiya refinery offline for at least 10 days.

Normalisation of operations at Zawiya and Ras Lanuf would absorb the bulk of the 188 300 bpd that was pumped into storage last month. However, with production averaging 120 000 bpd higher in October than September, a significant increase in exports will still be needed to sustain current output. BMI has previously flagged exports as a potential production bottleneck and continues to see this as a reduced threat.

For 2014, BMI forecasts crude exports of 238 000 bpd. This assumes exports averaging approximately 500 000 bpd over the fourth quarter.

Crude discounts spiking demand

Over the coming weeks, BMI expects favourable price differentials to support an increase in demand for Libyan crude. Despite broader weakness in the light sweet market, demand for Mediterranean sweets has proved relatively resilient. Stronger margins have pushed up run rates at European refineries, driving differentials for the major Mediterranean grades to multi month highs.

In contrast, Libya has cut the official selling price (OSP) for the bulk of its Brent linked grades. High premiums were a key factor in deterring buyers in June and July. More competitively priced, BMI now sees room for Libyan cargoes to displace other Mediterranean – alongside some West African – crude in the Atlantic market.

Structural weakness depressing prices

While favourable differentials will offer temporary relief for Libyan exports, the outlook for light sweet crudes remains bearish. Rising production globally and stagnant demand growth has led to increasingly oversaturated markets.

However, in the competition, Libya holds some advantages. Libyan crude favoured by refiners for its high middle distillate yield. Freight distances to the major demand centres are also lower than most of its competitors. And buyer sentiment is improving. Should pricing remain supportive, BMI sees room for a wider return of Libyan crude to market, adding further downward pressure on Brent.

The risks to the BMI short term outlook on Libya lie heavily to the downside. The weak and deteriorating political and security environment is inconsistent with 900 000 bpd production and the probability of further supply disruptions is substantial. BMI holds to a forecast of high but volatile output over the coming quarters.

Adapted from a report by Emma McAleavey.

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