The GERM Report

-Libya cease-fire agreement is shaky at best

-US shale may be under pressure for the foreseeable future

Crude oil prices started the day more or less in limbo, with the financial press warning of demand concerns given the surge in cases of the novel coronavirus and the onset of colder weather in the Northern Hemisphere. Then came the October surprise in the form of a “permanent” cease-fire agreement in Libya and pledges of a swift return to the 1 million barrel per day mark in output. We’ve been monitoring the slow return of Libyan barrels for the past few weeks, noting that recovery threatens OPEC’s delicate balancing act. Elsewhere, and it looks like Russia continues to support oil smuggling in the Middle East. In the shale oil patch, meanwhile, we’re seeing bankruptcies and mergers coming in at a pretty decent clip.

Crude oil prices were barely in positive territory in early-morning trading, though quickly lost steam on word of the Libyan cease-fire. The price for Brent crude oil was down 1.8% as of 3 p.m. ET to trade at $41.69 per barrel.

The Reuters news service started the day by noting Brent was holding onto $42 per barrel, but added there were demand concerns given the normal seasonal factors and the increase in cases of COVID-19 across the globe. France on Thursday extended a curfew and Belgium’s foreign minister was put into intensive care due to complications with her infection.

“There is little in the way of support from the demand side in view of the extremely high number of new COVID-19 cases,” Commerzbank analyst Eugen Weinberg was quoted as saying. “There is also pressure on prices from the supply side.”

And then came the fireworks. At 11:15 a.m. Geneva time, parties to multilateral negotiations announced they brokered a permanent cease-fire in Libya. Raging at least since the ouster of Moammar Gadhafi in 2011, a civil war in Libya has made the OPEC nation something of a thorn in the market’s side. OPEC data reveal the dramatic swings in Libyan production. In 2018, production averaged 951,000 barrels per day, jumped to about 1.1 million bpd during fourth quarter 2019, slumped to 348,000 bpd and effectively ground to a halt in June. The fine folks at S&P Global Platts told us Friday that Libyan production was currently at around 600,000 bpd. With the cease-fire agreement in place, Libya’s National Oil Corp. lifted force majeure on exports from Ras Lanuf and Es Sider ports, adding production would hit 800,000 bpd in two weeks and 1 million bpd within a month. Before civil war, output was close to 1.6 million bpd.

Few people we spoke with throughout the day expressed full-fledged optimism over the agreement. Presumably, repair work would be necessary for Libya’s oil infrastructure given the length of the conflict. A near-doubling of production in a month’s time would be a bit optimistic in our view. Acting UN special envoy to Libya Stephanie Williams said the agreement was certainly good news for the Libyan people, but acknowledged there was “a lot of work to do going forward.” And given the myriad of foreign and overlapping alliances in the country, we wonder if the likes of Russia and Turkey, which support competing sides in Libya, will play ball or see the cease-fire as another opportunity for a power grab. Tarek Megerisi at the European Council on Foreign Relations added “there is still no clear sign that Libyan belligerents are looking at this as anything other than a period of posturing and positioning to ensure they can dominate the next round of Libya’s transitional politics.”

And speaking of Russian influence, there are suggestions that its navy escorted the Iranian-flagged oil tanker Samah from the Suez Canal to Syrian waters. That’s a continuation of behavior we’ve seen since US President Donald Trump stormed out of the multilateral nuclear deal with Iran and slapped tough sanctions on the Islamic republic. We would expect these actions to continue if Trump manages to secure a second term in office. If Vice President Joe Biden wins, he’s expected to pivot back to the nuclear agreement and, we assume, allow more Iranian barrels on the water. Either way, Iran has continued to prove its mettle.

In the United States, Trump and Biden did about 10 minutes on the future of oil during a debate Thursday night. Trump stuck to the same themes as a supporter of big oil, while Biden struck a greener tone. US oil companies are on their back foot during the pandemic. Nearly 80 companies in North America have filed for bankruptcy and several others have merged together, notably Conoco’s acquisition of Concho earlier this week. That will inevitably lead to redundancies. Trump or Biden, we wonder if US shale will return to its pre-pandemic glory anytime soon. Success for a second-term Trump would depend largely on OPEC and the price of oil. For Biden, the green momentum largely preceded his bid for president so it may be damned if you do, damned if you don’t for US shale for the foreseeable future.