Expected increase in Libyan crude production weighs down prices

Market Realist

Libyan crude oil production expected to rise

Oil prices are fundamentally based on supply and demand dynamics. Higher supply weighs down prices (and vice versa). The Libyan Oil Minister, Abdulbari Al-Arusi, stated on August 5 that the country would produce ~800 thousand barrels per day the following month—up from ~700 thousand barrels per day. Given the indication of increased supply coupled with the fact that Libya is a member of OPEC (the Organization of the Petroleum Exporting Countries) and one of the major oil producers of the world, oil prices traded lower.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))

Libyan crude output tumbled in July

Oil prices had some support in July from a decrease in production from Libya through the month. Estimates showed that Libyan crude output fell ~330 thousand barrels to ~800 thousand barrels per day in July. The reason for the sharp decrease in output was because of unrest in the country caused by protests and battling militias. Libya has experienced varying degrees of unrest since the Arab Spring movement in early 2011.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part III))

Oil prices dropped slightly on the day

The day of Minister Al-Arusi’s statement, oil prices dipped slightly, to $106.56 per barrel from $106.94 per barrel at the prior trading day’s close. Lower oil prices are broadly a negative for oil producers such as Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Hess (HES), as they reduce revenues for the names as well as energy exchange-traded funds such as the Energy Select SPDR ETF (XLE).

(Read more: An Introduction to Oil and Gas Hedges: Collars)

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