Prospects For A Recovery In Libyan Oil Output Remain Uncertain

Libyan crude oil export levels are most likely to return to 300,000 barrels per day (bpd) by the end of 2011, and a return to the pre-revolutionary production levels of 1.6 million bpd should not be expected until 2013 at the earliest. This outlook will see Brent front-month futures contracts maintain a level above $100 per barrel through the end of the year, while continuing to retain a strong premium over West Texas Intermediate (WTI).

The absence of Libya’s valuable, high-quality crude from world markets will be a major contributor to the continued strength of Brent, while the lower price levels of WTI futures will continue to reflect domestic factors in the North American market.

Two weeks after the collapse of the Qaddafi regime, the prospects for a recovery in Libyan oil output remain uncertain. At the time the rebels moved into Tripoli, several estimates pegged Libyan oil production to return to 500,000-600,000 bpd by the end of 2011 and to the pre-revolutionary level of 1.6 million bpd by the end of 2012. Now as more information surfaces about the state of Libya’s oilfields, it is becoming increasingly likely that these estimates were overly optimistic. Estimating the recovery of Libyan production and the country’s return to global oil markets must take into account the state of the oilfields, production and exporting infrastructure, and the unstable political atmosphere.

Brent activity and Libyan uncertainty

The persistence of both a $110 price floor for Brent front-month futures contracts and a Brent premium of more than $20 over corresponding WTI contracts is largely due to concerns over Libya’s stability. Though pre-revolutionary Libyan output represented only about 2 percent of global production, Libya’s high-quality light, sweet crude retains significant influence over the market due to its sought-after position in European and emerging-market refineries. On August 22, October 2011 Brent futures fell from $108.62 per barrel to nearly $105, as the Libyan rebel advance into Tripoli appeared to bring an end to the conflict and sparked hopes of renewed Libyan oil production. But despite the collapse of the Qaddafi government, uncertainty returned to oil markets as traders began to reassess the Libyan political situation, and the October Brent prices inched back up, closing the week of August 22 at $111.36. With the exception of two brief dips earlier this week, October Brent has remained above $110 ever since. On September 6, it closed a record $26.89 over WTI; on September 9 it ended the day at $112.77 per barrel, at a spread of $25.53 over the WTI October contract.

That uncertainty was further reinforced by remarks on Monday by Nuri Berruien, the new chairman of Libya’s National Oil Company (NOC), whose outlook on the country’s oil prospects countered earlier statements by interim oil and finance minister Ali Tarhouni that Libyan oil production would be back at 500,000 to 600,000 bpd by the end of 2011 and back at pre-war levels of 1.6 million bpd by the end of 2012. Berruien, by contrast, has acknowledged that the 1.6 million bpd target may not be reached for at least 15 months. His words support more sobering reports from analysts at PFC Energy and Wood Mackenzie, who stated two weeks ago that it could be 2013 or even 2014 before Libyan production returns to the pre-war level.