Libya Reinstates Force Majuere on Oil Exports

Risk level: Yellow

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-Libya is the world’s playing field.

-Turkey itching to break out of Anatolia.

Libya on Sunday declared force majeure on oil exports after accusing agents of the United Arab Emirates of intervening in a messy battle for control. Only one tanker, the Aframax Kriti Bastion, managed to load before forces loyal to a rival government imposed a blockade ostensibly on Emirati orders. The battle for Libya pits Russia, Saudi Arabia and its allies against Western powers and Turkey, which has pursued a sort of Neo-Ottoman thread in the region. At its 21st century peak, Libyan oil invoked the will of the International Energy Agency and its capacity to send out 1 million barrels of oil per day remains attractive in the geopolitical arena. With the global attention pitted in large part on US political and pandemic distractions, the potential for a flareup in geopolitical tensions in the Mediterranean is real.

Volatility in the price of oil continues to diminish through July. The trade structure remains in contango, pointing to a future glut, though the spread narrowed in recent weeks. The situation has left Brent stuck in a bit of a holding pattern around $40 per barrel, though OPEC signaling the end of constraint is coming could send prices lower. Brent crude oil closed the week ending July 10 down 1% to end trading at $43.24 per barrel.

The Emirati government said Monday it wanted to see Libyan oil production return as soon as possible, “with safeguards in place to prevent fueling further conflict.” The United Arab Emirates sides with a rival government seated in the west of Libya, joining a Middle East bloc that includes Saudi Arabia and Egypt. Libya’s National Oil Corporation also said recently that Russian mercenaries had boots on the ground at its oil fields. The NOC last week managed to lift force majeure after months of setbacks, only to find rogue Field Marshal Khalifa Haftar remains influential despite a military retreat from Tripoli. In a weekend statement, the NOC said it received word that the UAE was the power that delivered the orders to Haftar to block oil exports. This, the NOC said, comes as UAE continues to pay lip service to resolving the conflict.

“We appreciate greatly the efforts of the United Nations, and the US to restart Libyan oil production and avert an escalation in the conflict,” NOC Chairman Mustafa Sanalla said. “If these efforts fail, as it appears they will, there must be consequences for the actions of the handful of states that are undermining the rules-based international order and destroying Libya.”

The US Embassy in Tripoli issued a statement in coordination with a Western- and UN-backed working group aimed a restoring stability to Libya that it supported NOC efforts to lift force majeure. The statement, however, provided little in the way of geopolitical posturing on what could very well become a proxy war in North Africa. Much of the Western criticism of the Libyan chessboard has come from France. French President Emmanuel Macron spoke recently with his Russian counterpart on the presence of Russia’s so-called Wagner mercenaries at Libya’s Es Sider field, accusing President Putin only of “ambivalence” over the situation on the ground. Macron reserved his harshest words for Turkish President Recep Tayyip Erdogan, saying Turkey’s role in the fight only encouraged a more direct role from Western adversaries. While Turkish air support was critical in repelling Haftar’s advances on Tripoli, the French president suggested his Turkish rival was in over his head.

“We won’t tolerate the role that Turkey is playing in Libya,” he said.

Libya would normally be an Italian concern, though the global pandemic has served as a serious distraction for some global managers. France, for its part, has tacitly supported Haftar, but has largely shied away from such direct finger-pointing. Given the absence of serious oversight, secondary powers are seizing the opportunity. Turkish naval forces blocked an Italian drillship from operating offshore Cyprus earlier this year as part of its bid to assert authority over the Mediterranean. On its long-standing fight with Greece, the Turkish president advised Athens to “know your place.”

Erdogan’s Neo-Ottomanism was put on display recently by naming the revered Hagia Sophia a mosque, capping off a decades-long fight to put Islam at the heart of the Turkish republic. Completed in 537 under Roman oversight, several of the Christian icons were covered over during the Ottoman Empire until it became a museum in the 1930s when Turkey moved toward a more secular trend. Erdogan’s move effectively ended that experiment, undermining the early vision of Turkey’s modern-day founder, Mustafa Kemal Ataturk. In the latter years of his administration, Erdogan has been flexing his muscles by playing a more assertive role in the Syrian civil war and expanding Ankara’s influence well beyond the Anatolia. Emboldened by his ability to remain durable, Erdogan has set his sights on the broader Mediterranean. While the Greek region is rich in natural gas, it is the Libyan oil prize and its geographical position that remains an interest to the geopolitical adventurists. And while it was the British interest that captured the media attention in the prelude to the Libyan civil war, Turkey has a long financial presence in Libya. With an estimated 48 billion barrels of oil reserves, Libya, as it was during World War II, could become the next geopolitical battleground.

Sensing the prospects for a recovery in global oil demand, parties to OPEC+ curtailments signaled during the weekend that constraint was coming to an end. That sent Brent down some 1% in early Monday trading. On Tuesday, watch out for a reading of German inflation and GDP in the United Kingdom. And not to be outdone by the customary data from the US Energy Information Administration, OPEC on Wednesday releases its latest monthly market report. The European Central Bank issues its rate decision on Thursday and market watchers will also be paying close attention to US payrolls. The week ends with a gauge of consumer sentiment in the United States for July so far. Given the influence of OPEC+ decisions, the July monthly market report and declining spreads, volatility is to be expected this week. But the market is calming down, so expect Brent to linger in the Yellow range, moving by about +/- 2% on the week.

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