Libyan oil blockade offers support for rival crudes

The latest blockade on Libyan oil production and exports could support prices for rival crude grades in the near term as European refiners seek alternatives. But any rise in demand will probably be short-lived given refining margins in Europe are falling.

The blockade — announced by the country's eastern-based administration on 26 August following rising tensions with the UN-recognised government based in Tripoli — appears to be taking effect at some oil fields, with at least two subsidiaries of state-owned oil firm NOC gradually cutting output already.

But according to one port agent, the blockade has yet to be implemented at export terminals. Although ship tracking data show no tankers have left any of Libya's ports since 25 August, two vessels are waiting. The Ohio is close to the Es Sider terminal and the New Amorgos is idling near the Zueitina terminal. These tankers, and possibly others, could still load in the short term as it will take a few days for Libyan crude production to wind down from its recent level of 1mn b/d.

Traders think September supplies are unlikely to load though, which means buyers of Libyan crude would need to find substitutes. The biggest impact will be felt by Libya's core customers in Europe, which accounted for more than 85pc of the country's 1mn b/d of crude exports in January-July this year, according to Argus tracking data.

European refiners have plenty of alternative options while the Libyan blockade is in place. Traders estimate 10-18 cargoes of September-loading Nigerian crude are unsold. Azeri BTC Blend is another possible replacement.

The amount of US WTI arriving in Europe in September is expected to be lower than in August, but there could still be at least 1mn b/d of that available. Supplies from South America, which have become more popular in Europe this year, can also act as substitutes for Libyan crude. Brazilian crude deliveries to Europe have averaged around 380,000 b/d so far in 2024, up by more than a quarter on the year, according to Vortexa, while crude imports from Guyana have shot up by 40pc to more than 310,000 b/d over the same period.

The blockade-driven uptick in demand could push the value of these replacements up by $0.50-1.00/bl relative to the North Sea Dated benchmark over the next week, according to traders. BTC Blend prices already jumped to a $4.55/bl premium against Dated on 27 August, up from a $2.70/bl premium on 23 August.

This support to prices is likely to be sustained for a short period only while European buyers cover their immediate needs, traders said. Crude demand in Europe is seasonally lower during the autumn and refining margins in the region are already falling, with diesel and gasoline cracks in the Mediterranean dropping by a respective 21pc and 30pc last week compared to 1-16 August. Higher crude prices would squeeze margins further, putting pressure on European refiners to cut crude runs, market sources said.

History repeating

How long Libyan crude might be out of the market is unclear, but events of the last few days bear some similarities to a previous blockade in 2020 when exports fell to just 68,000 b/d over an eight-month period. In both cases, the management of the country's central bank and the distribution of oil revenues are central to the tensions. The latest blockade is a response to moves by the Tripoli-based administration to replace the bank's governor.

While eastern Libya is home to most of the country's oil reserves and four of its oil export terminals, revenues from crude exports flow into the central bank, making it one of the country's most powerful institutions. Buyers of Libyan crude pay NOC but the funds cannot be liquidated without the central bank, according to sources. If these funds are blocked, it is difficult to restart production and exports, the sources said.

By Kuganiga Kuganeswaran and Lina Bulyk