Libya has the potential to upset the OPEC apple cart, and early expressions of high levels of compliance with the cuts agreed by OPEC and associated non-OPEC producers should be taken with a pinch of salt.
According to an interview with S&P Global Platts' Eklavya Gupte January 24, chairman of Libya's National Oil Company Mustafa Sanalla is targeting oil output of 1.25 million b/d by year's end. This target comes with many caveats, including consistent funding from the country's Central Bank. Given the volatility in Libyan oil output in recent years, it is not a target you would hang your hat on.
“We need some money for a quick restoration of our production,” he said. “The government has promised to give us money to have this amount of production.” He also said he was meeting officials from international oil companies in London with a focus on seeking investment and reconstruction in the country's oil sector.
Progress has been slow, owing to continued political tensions between Libya's UN-backed Government of National Accord and the Petroleum Facilities Guards, a militia which controls the bulk of the country's oil terminals. “I press on my view to restructure and reorganize PFG and to be under NOC like it used to be,” he said. “Others [militias] should join the Libyan National Army. We have to have policies to be able to control them. I am making my uttermost efforts to ensure this,” he said.
Nonetheless, the current trend looks positive. Output has almost tripled since August last year when it was around 230,000 b/d. All the country's major oil export terminals are currently open, although they are far from operating at full capacity as a result of damage caused after more than five years of civil year.
Libyan oil output was up 40,000 b/d in December on average at 620,000 b/d, according to secondary source estimates, and Sanalla said January production would not be far off NOC's initial target of 719,000 b/d. Steady gains through the year to 1.25 million b/d would mean the addition of 630,000 b/d from December's levels. Pre-conflict, Libyan crude oil production was as high as 1.6 million b/d.
The current deficit in the global market is between 700,000-900,000 b/d, which implies a stock drawdown this year of close to 300 million barrels. Large, but not that large when set against OECD commercial stocks that remain above the 3 billion barrel mark.
Based on the forecasts of the International Energy Agency, US Energy Information Administration and OPEC, oil demand growth in 2017 will be around 1.2-1.63 million b/d, but non-OPEC supply returns to growth of 200,000-410,000 b/d and OPEC's Natural Gas Liquid output — which like Libyan and Nigerian production is not included in OPEC production targets — is expected to rise by 100-350,000 b/d. Increases in Libyan crude production could therefore go a long way to extending the stock overhang, particularly if the US shale rebound proves more extensive than expected.
This possibility makes compliance with the promised production cuts all the more important, both in terms of actual volumes and market sentiment. Although OPEC and its non-OPEC associates are talking the talk, it is still unclear whether they will walk the walk. Some of the minor commitments and early reports of reductions are not far off normal fluctuations in monthly output.
Natural decline, already factored into forecasts, may make up others. The focus should be on export volumes and refinery throughput, as much as total output because variations in Middle Eastern oil for power demand could have a substantial seasonal effect – January and February are on average the two coolest months of the year for Saudi Arabia, reducing air conditioning demand there and more broadly across the region.
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