Oil prices steady after surging on Middle East tensions and Libya disruption

Supply of about 1 million barrels of oil a day is at risk of being disrupted amid differences between two rival governments governing the North African country

A general view shows an oil refinery in Zawia, 55km west of Tripoli. Libys is an important producer of crude in North Africa. Reuters

Oil prices steadied on Tuesday after surging by more than 3 per cent in the previous day on rising Middle East tensions and potential disruption to supplies from Opec member Libya.

Brent, the benchmark for two thirds of the world's oil, was trading 0.22 per cent lower at $81.25 a barrel at 12.04pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.36 per cent at $77.14 a barrel.

“Crude futures were pulling back from two-week-high settlements early on Tuesday, re-assessing Monday’s jump in risk premium triggered by a trifecta of events involving Ukraine and Gaza and the spectre of a loss of 1 million barrels per day of supply from Libya due to a resurgent political strife,” Singapore-based oil consultancy Vanda Insights said in a research note on Tuesday.

Tensions in the Middle East rose this week after Hezbollah fired hundreds of rockets and launched drones at Israel, which responded by hitting targets in several Lebanese villages.

The Iran-backed Lebanese militant group claimed to have struck 11 Israeli military sites, including those near Tel Aviv, with more than 320 rockets and drones, as retaliation for the assassination of its senior commander Fouad Shukr in Beirut last month.

The escalation between the two sides raised fears of a wider Middle East conflict and potential disruption to supplies from one of the important crude-producing regions in the world.

Developments in Libya, one of the key oil-producing countries in the North Africa region, are also affecting oil prices.

Differences between the two rival governments that govern Libya have grown in recent past, threatening the flow of crude from the country to the global markets.

A picture shows a house damaged in an Israeli strike in the southern Lebanese village of Khiam. AFP

The western part of the country is governed by the Government of National Unity, while the eastern region is ruled by the Government of National Stability which also controls about three quarters of the country's oil production capacity.

On Monday, Libya’s eastern government announced the shutdown of all oilfields, suspending production and exports. This follows a decision by a rival administration in the west to remove central bank governor Sadiq Al Kabir, whose role was to distribute the country's oil revenue between the two governments.

“The eastern government produces ... a substantial portion of Libya's overall production,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said, adding that US crude rose around 8 per cent in three sessions on the continued Middle East tensions and Libyan disruptions.

Remarks last week by US Federal Reserve Chairman Jerome Powell on cutting interest rates to support economic growth, which will increase oil demand in the world's largest economy, are also supporting oil prices.

On Friday, Mr Powell said inflation is declining in the US. “The time has come for policy to adjust. The direction of travel is clear,” he said during his keynote address at the Jackson Hole Symposium in Wyoming.

While he offered no further clues on the pace of rate cuts, Mr Powell's remarks at the annual gathering of central bankers cemented expectations of a rate cut when the Fed holds its next two-day meeting in September.

Oil prices are expected to rise in the medium term on geopolitical tensions but “the slowing global growth worries” will likely limit the surge, Ms Ozkardeskaya said.

Earlier this month, Opec lowered its demand growth forecast for this year, citing softening consumption in China.

Global oil demand is projected to grow by 2.1 million barrels per day this year, down 135,000 bpd from Opec’s initial forecast, the group said in its monthly oil market.