S&P: Libyan oil could be Azeri Light's main competitor in European market

Refiners have quickly snapped up the faster-than-expected 1 million b/d rise in Libyan crude production with scant effect on market structure, indicating firm demand, two top oil traders said Nov. 16.

"The early indications [are] that the market has been able to absorb these Libyan volumes without much panic," one trader said at an industry conference. "The impact of crude differentials to Dated Brent and other market contango was negligible. This is not a market which had no space for Libya's oil, as it did not incentivize storing of oil at sea."

Libya has rapidly revived its crude production over the past two months, following a ceasefire between groups battling for control of the fractured OPEC member. Output has now surpassed 1 million b/d, officials have said, up from less than 100,000 b/d in early September.
The recovery has surprised even Libyan officials, who had initially signaled a slower ramp-up to 700,000 b/d by December.

"The market is absorbing this increased and surprising production very quickly, and we don't see it's being stored on the water," a second trader said at the conference. "It is going to refiners. This is a good sign of the market rebalancing itself quickly."
The traders asked not to be named to be able to speak freely.

Demand for Libya's light sweet crude has been solid despite low refining margins and a fairly well supplied sweet crude market. Libyan crude has largely cleared in the Mediterranean and Northwest Europe, but some barrels are also moving to China.
Grades such as Sharara, Es Sider, and Sarir/Mesla have been attractive to these refiners as they remain cheaper than some other light sweet barrels, particularly long-haul grades. Libya's proximity to Europe's refining hubs has been another reason for the steady absorption of these barrels.

European refiners scrambled for Libyan grades, especially for November loading. Demand in December may slow down as lockdowns prompt refiners to decrease runs.
The rise in Libyan crude to Europe has also coincided with a fall in exports of US and West African oil to Europe.
Crudes such as US grade WTI, Kazakhstan's CPC Blend, Algeria's Saharan Blend, Nigeria's Bonny Light, and Azerbaijan's Azeri Light have been the main competition for Libyan grades, according to market sources.

These crudes have come under some pressure due to Libyan oil's return, but the impact has not been very stark as European demand has so far proved more resilient than some had expected.

Ultra-light Saharan Blend was assessed at a five-month low Dated Brent minus $0.65/b on Oct. 4, Platts data showed. Differentials have recovered slightly since then, and Saharan Blend was assessed at Dated Brent minus $0.40/b on Nov. 13.
Even with the strong demand for Libyan barrels, the traders said they did not expect OPEC and its allies to ease its production cuts when ministers meet Nov. 30-Dec. 1 to decide on quotas for the months ahead.

The OPEC+ alliance's supply accord calls for 7.7 million b/d in production cuts to taper to 5.8 million b/d in January. Still, ministers have hinted that the uncertainty over global oil demand levels with several European countries re-entering lockdown measures to combat the COVID-19 pandemic could force them to postpone their scheduled output increase to prevent a slide in prices.

Libya is exempt from having an OPEC+ quota due to its years of civil unrest, and the coalition now has to take into account the country's recouped market share in its deliberations.

"The market's expectation that market will not be burdened with 2 million b/d from January in one go," the first trader said. "A lot of things are being adjusted. OPEC has done a great job in adjusting very quickly to the reality of the situation."