Libyan protests leave crude buyers in limbo

A fresh spate of port blockades in Libya is creating short-term uncertainty for the country's crude customers, as political and civil unrest once again threatens to disrupt oil exports.

Crude loading at some of Libya's eastern oil terminals has been delayed intermittently by protesters since last week. The port of Es Sider is now closed again, having only reopened on 10 September. Nearby Ras Lanuf, where operations were also disrupted by demonstrators last week, is operational for the time being. Both terminals were shut on 8-9 September but reopened to allow three crude tankers to depart over the weekend.

At Es Sider, protesters are calling for the dismissal of Mustafa Sanalla, the chairman of state-owned oil company NOC, who is simultaneously embroiled in a long-running conflict with Libya's new oil ministry. The trigger for the Ras Lanuf protests is still not clear. Meanwhile, student graduates demanding job opportunities have been blocking loadings at the Marsa el-Hariga terminal since 9 September. The uncertainty over Libyan exports has supported price differentials for rival Azeri BTC Blend crude and, according to traders, it may also be incentivising sellers of US WTI Midland crude to test the market with firmer offers.

Some buyers are taking a wait-and-see approach to assess the severity of the latest bout of interruptions. Disruption in Libya's oil sector is frequent — driven by civil unrest, funding shortages or infrastructure problems — but typically it only becomes prolonged when there is military support, as with last year's port and field blockades which lasted over eight months. Brief interruptions at export terminals can still have a knock-on effect on production though. Oil companies in Libya are often forced to lower their output within a handful of days without an export outlet because of a lack of storage capacity at ports.

The uncertainty over whether the latest disruption will morph into longer-term shutdowns is deterring some Libyan crude buyers from looking for alternative grades for now, at least until NOC issues force majeure restrictions — a legal clause that removes the company's liability from providing supplies if it is faced with circumstances outside its control. Traders typically interpret the declaration of force majeure as a signal of lasting disruption, although on some occasions NOC has issued the measures only to remove them within days.

Substitution challenge

Substituting Libyan crude with alternative supplies of a similar quality that can be delivered promptly is a challenge for buyers, as it only takes a matter of days for Libyan crude to reach its main Mediterranean market. Algerian and Azeri grades are of similar quality to Libya's light sweet crudes and they load from Mediterranean ports, but they often sell out in the month that precedes loading. Another option is to substitute Libyan crude with long-haul cargoes of WTI Midland or west African grades that are already on the water, although this limited pool of alternative supply would likely be offered at a premium to regular transactions if the Libyan port disruption is seen to be long-lasting.

Argus tracking indicate that Libyan crude exports averaged 1.09mn b/d in the first eight months of this year, comprising both NOC's term allocations and equity supply. Most of Libya's term buyers are contractually obliged to be end-users of the crude, but some of NOC's customers do resell their cargoes. Comparatively attractive prices of Libyan grades have helped NOC to preserve its customer base in the face of regular interruptions, with the company's prices typically at a discount to rival crudes. The firm's official formula price for September-loading exports of light sweet Libyan grade Esharara has been set at a $1.15/bl discount to North Sea Dated, while this month's shipments of its closest rival, Algeria's Saharan Blend, are being marketed at a 55¢/bl discount to the benchmark.

Traders say the risks associated with buying from Libya explain the price difference. Some note that certain refiners either have a policy not to make direct purchases of Libyan crude or request to buy only when the cargoes have loaded. Sellers of Libyan crude often agree to source an alternative cargo should loadings halt in order to maintain long-term commercial relationships. Taking hedging positions that profit from increases in North Sea prices can help to soften the blow of Libyan loading disruption, one trader said. The political nature of Libyan outages means they can contribute to hikes in Ice Brent crude futures prices.

By Ruxandra Iordache