The GERM Report

Risk level: Yellow

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

THE BOOSTER SHOT

-Even if it reaches 1 million bpd, Libya would be short of its peak

-Tropical Storm Zeta barreling down on the Gulf of Mexico

We would be remiss to avoid Libya in our weekly long-form commentary. Rival factions last week shook hands under the watchful eye of the international community in Geneva, setting the groundwork for an increase in production. By the end of the year, Libya could be close to producing 1 million barrels per day, complicating the equation for OPEC+ in an already-extraordinary economic situation. That said, trade patterns are still showing crude oil indices stuck in pretty much the same band that’s been in place since mid-September. The IMF last week said the economic outlook was improving, though we still need to get through the next two quarters without major bruises. On the surface, it looks like we’re balancing out so we wonder about the shelf life of the Libyan news.

It was another volatile week for crude oil prices, with a Wednesday crash of around 3% on the back of a build in US gasoline levels. The EIA added that demand was a clear concern, with total products supplied over the last four-week period down nearly 13% from the same time last year. Meanwhile, what are we on now? The third wave of the pandemic? And then came Libya. In the end, Brent crude oil prices finished the week lower by 2.7% to finish the Friday session at $41.77 per barrel.

Last week in Geneva, the UN observed the signing of a “permanent” cease-fire between the rival administrations in Libya. Raging at least since the NATO-led intervention in the civil war in 2011, conflict led to wild swings in production from one of North Africa’s most lucrative oil players. Peak capacity is something like 1.6 million barrels per day, though market watchers over the years got excited if Libya reached 60% of that. So think of that when reading the next few sentences. 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. That’s still not even close to Libya’s peak.

Meanwhile, few people we spoke with Friday expressed full-fledged optimism over the agreement. There are a lot of hands in the Libyan pie. And 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.”

On a weekend panel for Gulf Intelligence, Mike Muller, the head of Vitol’s Asia group, said that even with the Libya news, there was “no breakout” for crude oil. Brent has been trading in a tunnel since around the middle of September. Apart from a big crash during the first week of October, Brent has been moving in a range of between $43.60 and $41.20 per barrel since Sept. 17. A mid-September rally was triggered by Hurricane Sally and indications that US shale oil won’t come back hard at these prices, and oil prices have been more or less stuck there ever since. Panelists for Gulf Intelligence painted something of a Goldilocks outlook for crude. Asian markets are pulling in more oil, but buying isn’t quite as hot as expected. The amount of “yeah, buts” in the market conversation over the last few weeks leaves us to wonder if we’re going to be stuck here for a while.

China last week forecast that its gross domestic product grew 4.9% year-on-year during the third quarter, faster than the 3.2% growth in Q2 and obviously better than the 6.8% contraction in the first quarter. Industrial output is accelerating and disposable personal income is up 3.9% over the first three quarters relative to the same period last year. Preliminary evidence shows China has been buying more oil this month. China last year accounted for about a quarter of all of the imported crude oil, besting the United States, the No. 2, by double digits. As the only game in town, we would expect to see a lot of those new Libyan barrels wind up in China. The general talk, meanwhile, is that the United States could see about a 1 million bpd contraction by the middle of the decade, so we could see some balancing out long-term. But again, we have to get through the next two quarters so hold on tight.

Looking at the week ahead, we already have a premium coming in the form of Tropical Storm Zeta, which will inevitably hit the Gulf of Mexico and refining centers in PADD 3 as a hurricane. There’s been no word on production outages, though BP has already started evacuating staff from four of its rigs. Durable goods orders in the United States could be a market factor, though it’s a rear-view look from September, before the big surge in coronavirus infections. Then there’s the inventory levels, but with such a busy hurricane season in the Atlantic this year, it’s hard to pin that data down as a major trend indicator. Traders have largely moved into the December contract by now, and we’re seeing upper $30s there for US crude. Thursday is the birthday of the Islamic prophet Mohammed and we wonder if we’ll see risk enter into the equation. But by then, we’ll all be talking about the expected outcome of the US presidential election. With Zeta coming in, the market to move a bit higher, though there’s always the Libyan question. We’re sticking with a Yellow alert, anticipating crude oil prices will move by about plus or minus 2% on the week.