Oil Prices Signal Most Favorable Supply in Year as Libya Returns

Jul 10, 2014 10:21 am ET

July 10 (Bloomberg) -- Oil prices are indicating the most favorable supply situation in a year, with Brent crude for August cheaper than later months as Libya revives exports, according to Norway’s biggest bank.

Brent futures traded for a third day in a price structure called contango, the longest stretch in a year that the front month has held a discount to later contracts. The collapse in the premium for near-term crude supplies reflects both the prospective return of Libyan shipments and subdued crude demand from refiners, according to DNB ASA.

“This is not a sign of a strong physical market,” Torbjoern Kjus, senior analyst at DNB in Oslo, said by phone yesterday. “Libya was probably the catalyst for the sell-off. People have started to price in some Libyan barrels returning.’

Libya is restoring crippled output after yearlong political protests at oilfields and terminals that reduced the nation to the smallest producer in the Organization of Petroleum Exporting Countries. Pumping has resumed at its second-largest oilfield, Sharara, and two oil ports in the country’s east reopened as protests ended, according to state-run National Oil Corp. Libyan production should rise toward 1 million barrels a day, from about 320,000 recently, according to consultant Petromatrix GmbH.

Brent for August delivery on the ICE Futures Europe exchange traded at $108.11 a barrel at 12:30 p.m. London time, 22 cents less than the September contract. Brent’s move into contango on July 8 was the first since a two-day spell ended April 15. The previous period was a three-day run in June 2013.

Investors Hurt

The contango could deepen because prices aren’t yet fully reflecting the return of Libya after previous deals to resolve political protests faltered, said Kjus. ‘‘I don’t think the market dares to price that in yet because there’s been so many false alarms,” he said.

Contango encourages traders to put oil in storage, then profitably sell futures contracts and deliver the supplies at a later date, according to Petromatrix, which is based in Zug, Switzerland. The structure can penalize financial investors seeking to maintain a position from one month to the next as the subsequent contract is more expensive, Olivier Jakob, the company’s managing director, said yesterday.

Final Nail

Libya was “the final nail in the coffin” for an oil market that was already very weak, Amrita Sen, chief analyst at Energy Aspects Ltd., a consultant in London, said by e-mail yesterday. Elevated crude prices deterred purchases by refineries in Europe and Asia, who are running down inventories accumulated during the early part of the summer, helping to flatten the premium on front-month Brent, she said.

Libya, holder of Africa’s biggest reserves, has 7.5 million barrels of oil stored at the ports of Es Sider and Ras Lanuf, which were reopened this month, Oil Ministry Measurement Director Ibrahim Al-Awami said by phone on July 7. Production has risen to 350,000 barrels a day, National Oil Corp. spokesman Mohamed Elharari said by phone today. Daily production was 300,000 barrels last month, according to data compiled by Bloomberg.

The sale of crude supplies held in storage will be gradual and in coordination with other OPEC members in order to maintain a stable oil market, Samir Kamal, the nation’s governor for the Organization of Petroleum Exporting Countries, said by e-mail July 8.

Contango Reversed

Front-month Brent will regain its premium, Miswin Mahesh, an analyst at Barclays in London, said by phone yesterday. If Libyan exports are restored, Saudi Arabia will temper its typical seasonal increase in production, ensuring that the contango is reversed, he said. Oil demand will also climb through the summer, depleting inventories of refined oil products, he said.

“I don’t see it getting wider than it is already,” Mahesh said of the contango. “We’ll see the spread move back into positive territory. We’re gearing up for oil demand to increase.”