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Why Libyan oil exports expect a boost after the peace agreement

Avik Chowdhury

Why resumed oil exports in Libya will benefit crude oil supply (Part 5 of 5)

(Continued from Part 4)

Libyan oil exports expect a boost after the peace agreement

On July 2, 2014, a treaty appears to have been signed by the two warring sides in Libya—the Libyan government led by the acting Prime Minister Abdullah al-Thani and the rebels led by Mr. al-Jathran. In an agreement between the two sides, the two major ports of Es Sider and Ras Lanuf in the eastern part of the country were allowed to resume operations. Oil terminals in these two ports accounted for almost 50% of the country’s crude oil exports. The upward movement of the crude oil prices owing to the Iraq crisis was somewhat reversed by the positive developments in Libya.

Confirming the agreement, Libya’s acting Prime Minister Abdullah al-Thani said a press conference, “We have received today Ras Lanuf and Es Sider oil ports. This is the end of the oil crisis.”

Brief overview of oil production in Libya

Exports from these two terminals were ~560 thousand barrels per day of the Libya’s total crude exports capacity of 1.3 million barrels a day. Following the deteriorating situation since the fall of the last President of Libya, Mr. Muammar Gaddafi, oil production dived to one-fifth of Libya’s production capacity. In August, 2011, oil supply from Libya came to zero and remained at a low level during that period. It subsequently recovered in the first half of 2013, before falling back again. In May, 2014, crude supply was ~23 thousand barrels per day in Libya.

Libya is a member country of the Organization for the Petroleum Exporting Countries (or OPEC), which coordinates and unifies the petroleum policies of its member countries and ensure the stabilization of oil markets. According to the Energy Information Administration’s (or EIA) Short Term Economic Outlook released in June, 2014, OPEC crude oil production averaged 29.9 million barrels per day in 2013. Total OPEC liquid petroleum accounted for ~61% of aggregate global production by May, 2013.

How a change in the Libyan oil situation affected Brent crude price

Brent crude price represents the prices received internationally. The Brent price has gone down below $112 a barrel from its year-to-date (or YTD) high of $115.06 recorded on June 19, 2014. On July 3, 2014, Brent was trading at $110.79. The fall in the Brent price coincided with the prospect of a resumption of exports from the two terminals in Libya. The effect of a stable political situation in Libya would lead to fall in oil price. Higher crude prices generally have a positive effect on stocks in the energy sector. Upstream names that produce oil and gas see higher revenues, cash flows, and returns from higher oil prices. As a result, this causes upstream companies to invest more money in drilling more oil wells, which benefits oilfield service companies.

An improvement in the political situation in Libya would lead to higher production and export of crude oil from Libya to the rest of the world. Higher supply of oil can help reduce oil price, which would negatively affect oil producers like ExxonMobil Corporation (XOM), ConocoPhillips (COP), and EOG Resources Inc. (or EOG). It’s important to note that most of these companies are components of energy exchange-traded funds (or ETFs) such as the Vanguard Energy ETF (VDE). However, this would be positive for oil producers who have active participation in oil production in Libya like Occidental Resources (or OXY), Statoil ASA (STO), ConocoPhillips (COP), and Marathon Oil Corporation (or MRO). Some of these are components of the Energy Select Sector SPDR (XLE).

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