Turnaround season in US refining has caused a major oversupply of US crude, but international markets have been roiled by a surprise re-outage in Libya. In this note we focus on the Libya issue. We also address the countervailing improvement in US-Iranian relations and the upcoming decision on Chinese-Iranian oil imports sanctions exemption. We very briefly show Iraqi, other OPEC, and Saudi production. Notably, the 550kb/d fall in Iraqi production from 2012 highs to September 2013 lows was under-appreciated by the market, obscured as it was by Syria, Egypt, Libya, and Iran. Note: IEA non-OPEC supply forecasts of 1.8mb/d marginal growth for 2014 are for an all-time high.

Things can’t get worse in Libya
The 1mb/d+ outages that have characterized oil markets since the 2008 peak price have been due to Libya and Iran. To be clear, these are enormous outages that have clearly driven global (Brent) oil prices higher. For thirty years Libya, for all its international controversy, steadily supplied world oil markets with around 1.3mb/d of light sweet oil. Consensus was that the relatively small population of Libya, at around 6m, made it politically stable. Until it wasn’t. Now the country is in disarray, with factions independently taking control and interrupting oil exports. There is no single movement here, as we show in this note. However we do take the view that the situation in Libya cannot now get materially worse, with possibly less than 90kb/d of exports of light sweet crude, there is little left to lose, and plenty to gain. The country is working on a new constitution, and we think there is reason to believe that it is this process that is causing the upsurge in disruption by local interests.

A huge shift in Iran
’s newly-elected President Hassan Rouhani has ushered in a seismic shift in global geopolitics that has reverberated across the oil world, notably to the consternation of the Saudis and other Sunni Gulf oil states. With the all-important blessing of Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s Parliament, Rouhani quickly reached out to US President Obama directly, and subsequently has moved Iran into nuclear talks over enrichment that had all but died under the leadership of previous President Ahmadinejad. Although nuclear talks in Geneva have ended, there is agreement to meet again as soon as November 20. Rouhani openly hopes for a deal to sanctions that have been the primary cause for the precipitous drop in Iranian oil production and exports. Intelligence suggests that the Obama regime is pushing Congress to soften its stance on sanctions while negotiations are underway, with a notable upcoming decision on the potential for an exemption for China to import Iranian oil, that needs a decision by December 2.

Eoin Treacy's view

The Brent Crude – West Texas Intermediate spread remains a useful illustration of just how much the global oil market has changed. For decades Brent traded at a discount to WTI, this situation began to change from the early 2000s when the relationship became much more volatile. On the chart we can see that the last three years are distinctly different. As with any spread it is worth considering influences on both constituents.

Geopolitical risk, measured in barrels of oil production lost, has become more of a factor in the Middle East as a result of the Arab Spring. Therefore the fact that Libyan oil exports have returned to close to zero (and cannot fall further) and that Iran’s détente is progressing can be viewed as positive factors which should eventually remove upward pressure on pricing. However, until that takes place Brent crude is more likely than not to remain rangebound. It bounced over the last couple of days from the psychological $100 level and a sustained move below it would be required to confirm medium-term supply dominance.

West Texas Intermediate is influenced more by North American dynamics and reflects the revolution in both US onshore unconventional supply, the return to drilling in the Mexican Gulf and continued Canadian supply growth. Prices encountered resistance in the region of the upper side of the two-year range from late August and continue to trend lower. WTI has now returned to test the progression of incrementally higher major reaction lows, evident since 2012, but a clear upward dynamic will be required to check momentum beyond a brief pause.

The US Daily National Average Gasoline Price hit a new reaction low yesterday and a clear upward dynamic would be required to confirm support in the region of the lower side of its two-year range.