Oil prices fell again this week as lower than expected demand for gasoline combined with two major oil fields in Libya resuming production to further depress crude prices. The combination of lower than expected demand and increased production stoked concerns that despite the efforts of major oil producers the global inventory surplus would remain unaffected.
U.S. gasoline futures fell on Thursday at one point hitting the lowest level for the season in eight years. This drop was brought on by data on Wednesday showing inventories rising at the highest rate in three months. This unexpected rise brought on fears among traders that the start of the U.S. summer driving season would not have the predicted effect of lowering gasoline inventories. This in turn brought the price of Brent Crude Oil to $51.44 and WTI Crude Oil to $48.97 at the opening of the U.S. market on Friday.
Industry insiders cite gasoline demand as a key factor in preventing crude prices from rising but the story does not end there. Global inventories have been steadily rising this year in part due to increased production from the United States which has been pumping out well over 9 million barrels per day (bpd). Adding to this atmosphere of plentiful production are Libya’s Shara and El Feel oil fields which are capable of producing nearly 400,000 bpd production after protests blocking the pipelines came to an end.
Protests by armed groups shutting down pipelines as well as Islamist militant attacks have been a persistent problem in Libya since Muammar Gaddafi was overthrown in 2011. When Gaddafi was in power prior to the Libyan civil war, oil production from the country stood at 1.6 million bpd. Since then due to the turmoil which has gripped the country production has fallen to less than 1/3 of those levels with Libya producing just 491,000 bpd as of Thursday. The Shara and El Feel fields resuming production will nearly double Libya’s production capacity and go a long way toward helping the country meet its stated goal of producing 1.1. million bpd by August of this year.
This news comes as the Organization of Petroleum Exporting Countries (OPEC) continues its negotiations with Russia to extend a production cut of 1.8 million bpd into the second half of 2017. Russia is the world’s leader in oil production and has been increasingly reliant upon oil sales to drive its economy since the imposition of economic sanctions by the United States and the European Union in 2014. Mohammad Barkindo the Secretary General of OPEC insisted global supplies were falling and stocks needed to fall further.
Barkindo did not directly state whether or not the production cut would be extended. However, he did comment that OPEC’s President in 2017 and the Saudi Energy Minister Khalid al-Falih was leading an effort to bring about a consensus between the representatives of OPEC nations. It is considered important for OPEC to achieve this consensus prior to the ministers meeting in Vienna on May 25 to discuss among other things extending the production cut.
Libya is a member of OPEC but is exempt from production cuts along with Nigeria and Iran. It is considered that the reduced income that would come from such a cut would have a severely detrimental effect upon the economies of those nations.
