Fighting breaks out in Libya

By Richard Rostad, analyst, Oil & Gas 360

Oil prices rose today, as geopolitical risk threatening supply instability once again asserted itself in the markets.

WTI prices rose by 2.16% today, finishing the day at $64.44. Brent, meanwhile, rose by 1.07% to $71.09.

Instability in Libya has once again imperiled the country’s output, as rival groups struggle for power. The warlord Khalifa Haftar, who controls much of the eastern and southern portions of the country, has now moved to attack the internationally recognized government in Tripoli.

This move marks the end of a fragile peace that has persisted while the UN and several nations attempted to negotiate a settlement between the rival governments. While it is too early to predict whether Haftar’s attack will succeed, fighting is already growing fierce. A major oil export terminal, located just west of Tripoli, will likely be a major goal for Haftar’s forces and could be damaged in the fighting. Similar clashes among rival militias destroyed much of Libya’s export facilities after the country’s 2011 revolution.

Geopolitical Problems Drive WTI to $65

A Haftar victory could also complicate Libyan exports even if export facilities are unharmed in the fighting. Most foreign buyers refuse to deal with Haftar, a situation that was demonstrated in June 2018. That month saw Haftar’s forces seize several export facilities from Tripoli’s National Oil Corp, installing his own oil corporation. When international buyers rejected Haftar’s authority, Libyan exports dropped by 800 MBOPD until the terminals were returned to Tripoli’s NOC.

Sustained conflict between the internationally-recognized government and Haftar’s forces will likely upset the current oil production system, as Haftar controls over 1 MMBOPD, the vast majority of the country’s production capacity, while the government holds the export facilities. This situation may see Haftar cut off production in an attempt to starve Tripoli of funds. Whatever happens in the coming days, Libyan oil shipments are likely to be limited.

IRGC terrorist designation, expiring sanctions waivers impact markets

Oil was further buoyed by the U.S. government’s designation of Iran’s Revolutionary Guard Corps (IRGC) as a terrorist group today. The IRGC is a major wing of the country’s military but is also a major part of the country’s economy. Designating the group a terrorist organization will make business deals with Iran much more difficult, as any entity that provides “material support” to the IRGC, including any of its subsidiary businesses, can face criminal charges.

Iranian uncertainty will be prominent this month, as in addition to the new terrorist designation Iranian sanctions waivers are set to expire this month. While some waivers may be extended, the prospect will impact oil markets until the U.S. government decides how to proceed.

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