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Oil trade tracks Libya cargo as test of nation’s return

GRANT SMITH and MAHER CHMAYTELLI

ZUEITINA, Libya (Bloomberg) -- A port in eastern Libya is once more the focus of oil markets, three years after it was the scene of a battle in the overthrow of Muammar Qaddafi.

The Zueitina oil terminal, 550 mi (885 km) east of the capital Tripoli, is due to load its first tanker since being seized in July by separatists. The restart matters because it’s a condition for the return of two bigger rebel-held export terminals to government control, according to Danske Bank A/S. Should all three become operational, crude prices would drop about 5%, the bank estimates.

Oil output in Libya slumped about 80% since the start of the uprising against Qaddafi in 2011. Supply from what is now OPEC’s smallest producer influences the price of Brent, Europe’s benchmark crude, relative to West Texas Intermediate, its U.S. equivalent. The world’s most-traded oil spread widened to as much as $23 a barrel last year, from about $3 at the end of 2010. It has since narrowed to $8 as the central government reached peace deals with the rebels.

“Developments in Zueitina are a good litmus test for how swiftly the bigger ports can resume,” Miswin Mahesh, an oil analyst at Barclays Plc in London, said April 30. “The reopening of these ports is crucial and negotiations around this are expected to take place once there is good faith achieved between both parties.”

An oil tanker will collect a 600,000 bbl cargo at Zueitina for shipment to Europe, Mohamed Elharari, a spokesman at state-run National Oil Corp., said by phone from Tripoli on May 1. The tanker Ottoman Tenacity was due to arrive, according to ship-tracking data compiled by Bloomberg.

The announcement on April 28 that Zueitina loadings would resume cut the premium of Brent to WTI by $1.70 a barrel, the most in four months. Brent is used to price more than half the world’s oil.

With the 70,000 bpd Zueitina port open, traders are waiting now for the restart of the 340,000 bbl Es Sider terminal, the nation’s largest, and Ras Lanuf, with a daily capacity of 220,000 bbl, Olivier Jakob, the managing director of Petromatrix GmbH, a consultant in Zug, Switzerland, said by email on April 29.

The 110,000 bpd Hariga terminal resumed exports on April 17 and has since shipped a total of 1.85 MMbpd, almost enough to fill a supertanker.

Brent’s premium to WTI raised costs for refineries in Europe relative to other regions, contributing to the biggest wave of plant closings in decades. It also diminished the competitiveness of exports from suppliers that use Brent as a benchmark, such as Algeria and Nigeria.

Brent futures for June settlement traded at $107.70 a barrel at 1:30 p.m. Singapore time, extending this year’s drop to 2.8%. The benchmark grade climbed by about a third during the 2011 uprising against Qaddafi, reaching that year’s peak of $127.02 on April 11.

A resumption of shipments from Es Sider and Ras Lanuf would almost triple Libya’s export capacity to 885,000 bpd, according to Oil Ministry data. It could drive Brent down by about $5 a barrel, Danske Bank estimates.

While Libya’s government said April 24 that it would have control of all eastern terminals within a month, officials said at least four times between August and December that ports could restart, only for blockades to persist. The Brent-WTI spread is currently about twice as wide as it was just after the peace deal was announced in early April, reflecting traders’ caution about the agreement.

Zueitina and the nearby town of Ajdabiya were a strategically important front line in battles three years ago that led to the ouster of Qaddafi, Charles Gurdon, an analyst at Menas Associates, said by phone from London. It was the smallest facility blockaded by the separatists.

The self-declared Executive Office for Barqa, which seeks autonomy for the eastern Libyan region also known as Cyrenaica, have occupied the terminals since July. Rebels agreed on April 6 to hand over control of Zueitina and Hariga in exchange for an amnesty and the payment of salaries to defectors from Libya’s Petroleum Facilities Guard.

While rebels are showing cooperation with the accord by re-opening Zueitina, they will still require back payments of salaries and jobs for former Petroleum Facilities Guards before restarting Es Sider and Ras Lanuf, according to Richard Mallinson, an analyst at Energy Aspects Ltd. in London.

Once the conditions on jobs and pay are met, “the rebels are still looking for commitments on revenue and power sharing for the Cyrenaica region,” Mallinson said by email on April 29. The Executive Office for the Barqa region said in February it was seeking 15%  of revenue from national crude sales.

A resolution of the dispute with eastern rebels would still leave the government contending with protests from groups in the west that have also curbed oil output.

Daily crude production in Libya was about 300,000 bbl on April 30, according to Elharari. The country pumped 1.6 MMbpd prior to the 2011 uprising, data compiled by Bloomberg show.

“Libya has been one of the top factors in impacting Brent prices since the beginning of the revolution in 2011,” Abhishek Deshpande, a London-based analyst at Natixis SA, said in an email on April 30. “Zueitina’s re-opening lays a potential foundation to improving the relationship between the Libyan government and rebel forces.”

05/02/2014

 

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