Viewpoint: Libyan recovery key to Med crude complex

The outlook for the Mediterranean crude market next year is heavily dependent on the stability of recently restored Libyan exports.

Blockades imposed by the Libyan National Army (LNA) halted much of the north African country's crude output and exports for around eight months this year. But in the weeks since the restrictions began to be lifted in September, prices for competing Algerian crude have gone up rather than down, with regional refiners wary over the reliability of Libya's renewed output. Since a ceasefire deal was struck between the LNA and the UN-backed Government of National Accord (GNA), Algeria's light sweet Saharan Blend's differential against North Sea Dated has gained around 30¢/bl, temporarily reaching premiums as high as 35¢/bl over the Atlantic basin benchmark.

Libyan production had reached 1.28mn b/d as of mid-December, after averaging just 100,000 b/d in February-August. If state-owned NOC can sustain output at current levels into 2021, competition with rival grades will intensify. The ceasefire is holding for now but lasting political stability in Libya is far from guaranteed, nor is the investment required to maintain the country's existing oil infrastructure. In the short term, maintenance work at the Mellitah oil terminal will restrict Libyan exports in February. Longer term, sustaining the output recovery will require development drilling, extensive well maintenance and restarting closed wells.

If NOC does manage to sustain or even grow output in 2021, pressure on Libya to participate in the Opec+ production restraint accord will increase. Along with fellow Opec members Iran and Venezeula, Libya is exempt from the deal. Its production is already above October 2018 levels, the baseline used to calculate most of the group's output cuts, but NOC chairman Mustafa Sanalla has said production must first stabilise at 1.7mn b/d before Libya will consider accepting a quota.

The Opec+ group's collective production ceiling rises by 500,000 b/d in January, including a 126,000 b/d increase for both Saudi Arabia and Russia and a 53,000 b/d hike for Iraq. Any subsequent adjustments will be decided on a monthly basis, allowing the group to take a more agile and short-term approach to market management while the Covid-19 pandemic persists.

Higher Opec+ quotas could lead to increased flows of sour crude from the Mideast Gulf to the Mediterranean, but not necessarily from Iraq. Despite Baghdad's higher production ceiling in January, exports of the country's flagship Basrah crudes to Europe and the Mediterranean may actually fall in 2021. Iraq has yet to fully compensate for past overproduction, and four European and Mediterranean refiners have reported year-on-year cuts of 5,000-20,000 b/d to their Basrah term volumes for next year.

From January, Iraq's term customers will be able to nominate one of three Basrah grades, following the introduction of Basrah Medium. The decision to split the Basrah stream into three grades has prompted Iraq to update the quality specifications of its Basrah Light and Basrah Heavy grades and to overhaul its quality compensation scheme. Traders have suggested that the revamped Basrah Light may struggle to compete with more attractively priced Russian Urals in the Mediterranean, and that the majority of supplies will be absorbed by buyers east of Suez. Basrah Medium — at 29˚API and with 3pc sulphur content, on paper — is the Iraqi grade most likely to compete with Urals, market participants say, despite being heavier and roughly twice as sulphurous.

By Felix Todd