In addition to EM tensions, the crisis in Libya could cause oil prices to overshoot By Investing.com

Investing.com — In the Middle East and North Africa (MENA) region, recent geopolitical developments have increased the focus on oil markets, with the developing situation in Libya receiving particular attention.

Ongoing tensions between Israel and Hezbollah in the Middle East have raised global concerns, but the deepening political crisis in Libya is a more immediate threat to global oil prices.

Analysts at Citi Research warn that the potential cut of up to 900,000 barrels per day (b/d) of sweet from Libya could push prices into the mid-$80s a barrel, further complicating the already precarious global energy landscape.

Libya, a key player in the world oil market, is once again on the brink of a significant crisis. The country’s political instability, driven by a power struggle between its divided elites, threatens to disrupt its oil production and exports.

The ongoing dispute centers around control of Libya’s Central Bank and the management of oil revenues, with factions fighting for dominance over the country’s most important economic asset.

Citi Research reports that the worsening political situation in Libya could disrupt up to 900,000 bpd of light and sweet crude oil flows.

Such a disruption would have a significant impact on global oil markets, especially given that Libyan crude is highly valued for its low sulfur content. The potential supply shortfall could trigger a rally in Brent crude prices, with analysts forecasting a possible break into the mid-$80s per barrel range.

Geopolitical risks in Libya are intensifying due to a combination of factors that could further exacerbate the situation. A key issue is the disruption of the El Sharara oil field, one of Libya’s largest, which has been badly affected by political tensions.

This disruption was initiated by Saddam Haftar, the son of eastern Libyan military leader General Khalifa Haftar, who ordered the closure of the field in response to an international arrest warrant against him.

Although production at El Sharara has partially resumed to meet domestic demand, it remains significantly below capacity, operating at just 80,000 barrels per day (b/d) of a potential 300,000 bpd. This supply reduction is already tightening the global market for light, sweet crude, and any further disruptions could have serious repercussions.

Adding to these challenges is the upcoming refinery maintenance season, which, along with potential additional supply from OPEC+, could temporarily ease some pressure on crude prices.

However, this may not be enough to offset the effects of a prolonged supply disruption in Libya.

“The sudden shutdown of the El Sharara oil field could prompt OPEC+ to continue with its planned 4Q’24 cut of around 200 kb/d, mostly acres, which, even if fully offset by the El Sharara shutdown, would further unbalance the global spectrum of crude oil quality,” the analysts said.

The impact of the crisis in Libya is expected to affect the price differentials between sweet and sour crude oil. The shutdown of Libyan oil fields, particularly El Sharara, has already begun to squeeze the supply of light, sweet crude.

Citi Research predicts that even without a complete shutdown of Libya’s oil export flows, price differentials between sweet and sour crude could widen, with the Brent-Dubai futures exchange (EFS) potentially widening from the current $1.85 each. barrel.

Further complicating global oil market dynamics is Kazakhstan’s potential adoption of a new compensation plan, which could reduce its CPC Blend exports by more than 200,000 b/d in October 2024. This reduction would primarily affect competition with flows West Texas Intermediate (WTI), adding another level of complexity to an already tense market.

The potential disruption in Libya comes at a critical time for global oil markets, which are already facing volatility from broader geopolitical tensions in the Middle East. The situation between Israel and Hezbollah, while currently contained, could escalate, leading to further instability in the region.

Citi Research analysts suggest that any significant escalation could lead to a wider blockade of oil export flows, particularly to Libya, which could push oil prices even higher.

In addition, the political situation in Libya is precarious, with the possibility of further deterioration of the armed conflict if international efforts to mediate the crisis fail.

Such a scenario would likely result in a prolonged disruption of Libyan oil exports, exacerbating the supply-demand imbalance in the global oil market and potentially leading to sustained price increases.