Oil prices drop more than 4% on concerns of rising supply amid slumping demand

The possibility of an imminent deal to restore Libyan oil supplies to the market led to the decline

A worker checks pipes and valves at Amaal oil field in eastern Libya. Reuters

Oil prices dropped sharply on Tuesday to below $75 per barrel on concerns about supply increasing following the possibility of an imminent deal in Libya to restore oil production amid slumping global demand.

Brent, the benchmark for two thirds of the world's oil, was trading 4.55 per cent lower at $73.99 per barrel at 8.40pm UAE time on Tuesday, the lowest intraday price since December last year. West Texas Intermediate, the gauge that tracks US crude, was down by 3.96 per cent at $70.62.

The drop came after a report by Bloomberg cited a Libyan central banker as saying that there were “strong” indications that the divided political factions in the country were close to reaching an agreement.

That would restore crude from the country into the market after oilfields were shut down in August amid the political crisis.

Oil prices were already down on weak demand mainly driven by a slowdown in manufacturing activity in China.

The country's manufacturing activity shrank for the fourth straight month in August and dropped to the lowest levels in six months, according to the National Bureau of Statistics’ latest Purchasing Managers' Index.

“The crude oil market sentiment remains under pressure as China's economic slowdown shows little sign of improvement … compounded by the rapid adoption of EVs [electric vehicles] and hybrid cars, which is reducing fuel demand,” said Ole Hansen, head of commodity strategy at Saxo Bank, in a research note issued on Tuesday.

“This has led to lower refinery runs and diminished overall oil demand,” he added.

Adding to the bearish sentiment, the Opec+ bloc is set to increase oil output in October as part of its plan to gradually reverse the previous supply cuts.

“While disruptions in Libyan oil supply have provided some support to prices, the overall outlook for the oil market remains challenging … the combination of increased supply and potential demand weakness could continue to weigh on prices in the coming months,” said Mohamed Hashad, chief market strategist at Noor Capital.

Libya remains split between the UN-recognised government in Tripoli, led by Prime Minister Abdul Hamid Dbeibah, and a rival administration in the east, supported by military commander Field Marshal Khalifa Haftar. Most of Libya's oilfields fall under his control.

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

“The situation in Libya is notably complex, with recent reports indicating that around 70 per cent of oil production has halted and exports from ports have stopped,” Zain Vawda, market analyst at Oanda said in a Tuesday note.

“Despite this, the impact on oil prices has been minimal due to uncertainty over how long these issues will persist. If more information becomes available regarding the duration of the disruptions, we could see a more significant effect on oil prices.”