Oil gains from disruption of Libyan supply, and the coming of winter

Crude advanced from Friday’s close with Brent climbing 1.1 per cent.

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Oil prices inched upwards on Monday, helped by rising demand for heating fuel in the northern hemisphere, and the effect of constraints on the supply of Libyan crude.

Crude advanced from Friday’s close, with Brent climbing 1.1 per cent, or 69 cents, to $60.14 in late afternoon trading UAE time.

“I believe the oil prices will consolidate, or see positive growth, in the coming weeks,” said Pradeep Unni, the head of commodities trading at Richcomm Global Services DMCC.

Analysts also cited the threat of disruption to supply after a rocket hit Libya’s largest oil port, Es Sider, on December 13. Clashes between two groups claiming control over Libya resulted in five tankers being set on fire destroying 800,000 barrels of crude oil, Libya’s National Oil Company reported.

Before the unrest that has plagued Libya since February 2011, the country was producing an estimated 1.65 million barrels per day (bpd) of high quality, light sweet crude. This type of crude is the most widely preferred and traded because it has a very low sulphur content and is used to create high-value products such as petrol, diesel fuel, heating oil and jet fuel.

Es Sider exported 21 per cent of Libya’s production, approximately 350,000 bpd at its peak, according to estimates from the US Energy Information Administration (EIA). Libyan production will end the year 40 per cent lower, at 385,000 bpd, compared to 650,000 bpd in January.

Fighting was also reported west of Es Sider in Sirte. The Sirte basin accounts for most of the country’s oil output and about 80 per cent of Libya’s recoverable reserves.

Another positive factor working against the supply glut is the higher demand for heating oil as winter hits major energy consumers.

During last month, the EIA said heating degree days (HDD) – when temperatures drop below 18°C requiring buildings to be heated – were estimated at 18 per cent higher than the previous 10-year average for November.

“The market is significantly oversupplied through the first half of the year, said Jason Gammel, an analyst at Jefferies. “It’s going to take further growth in GDP to spur demand growth.”

Mr Gammel added that many companies were making significant cuts in their capital expenditures, which could further affect supply. “That will lower the pace of supply growth from non-Opec sources, mostly the US, but that will take months to play on.”

Arabian Gulf oil exporters are feeling the effect of the weaker oil price as they prepare budgets for the year ahead. Saudi Arabia released its budget on Thursday, anticipating its fiscal deficit to increase by more than 100bn riyals.

“Opec countries are not comfortable with current oil prices, and it is causing budget deficits,” said Mr Unni, referring to Opec’s largest supplier, Saudi Arabia. “If oil prices remain at current levels, we’ll see some reactions to the production at the next Opec meeting. The discomfort in oil prices dropping is visible in many oil countries.”