The rebel advance in Libya paves the way for shuttered oil fields to resume production, but hopes that the country's much-needed oil will soon gush back onto world markets proved short-lived.
Brent crude, the European and global benchmark, dropped 3 per cent in morning trading but climbed back to end the day off less than 1 per cent. West Texas intermediate (WTI), the benchmark U.S. grade, gained slightly.
War-torn Libya is currently producing a small fraction of its capacity of 1.6 million barrels a day. Libya's liberation was expected to send oil plunging, and alleviate fears that high prices are adding to the risk of a double-dip recession.
But as rebels take control of Tripoli, analysts say a host of technical, security and political problems means a speedy recovery of production in Libya is unlikely. Caroline Bain of the Economist Intelligence Unit said it could take two to three years to get Libya's mature fields back into top form, though others said it would take less time.
Libya's production was equivalent to about 2 per cent of world demand before the Benghazi-based rebels launched their campaign to depose Moammar Gadhafi, Libya's dictator since 1969, in February. The war – and the oil field neglect and sabotage that went with it – pushed production down to 100,000 barrels a day or less.
In a tight global market, that was enough to help propel Brent prices to a post-financial-crisis high of $127 (U.S.) a barrel in April. Brent finished at just under $108 on Monday, and the spread between Brent and WTI levels remains unusually wide.
One big reason for the surprisingly small dip in oil prices is lack of knowledge about the state of Libyan oil fields. While it appears the fields are in better shape than the torched Iraqi fields after the Second Gulf War, in 2003, they are expected to require considerable investment to get them pumping again.
"Beyond the security issues, damage to infrastructure has been reported following numerous attacks by government forces, and there is not much clarity regarding how much damage the oil fields or infrastructure have sustained," analysts at Barclays Capital said in a note Monday.
Barclays said the political landscape is equally unclear. Even if the Libyan oil fields were found to be in good shape, there is no government or regulatory agency to oversee them. Libya has no parliament, constitution or civil organizations. The makeup of the Transitional National Council, which includes several former members of the Gadhafi regime, is far from a picture of harmony and co-operation. While most Libyans are delighted that four decades of Gadhafi dictatorship are over, they may resist a government that represents the Benghazi movement from eastern Libya.
"Even if regime change does unfold, the prospects for Libyan oil exports this year are not very good, in our view," Barclays concluded.
JBC Energy, a Vienna energy consultancy, had a similar view. "A speedy resumption of Libyan oil production is still some way off," it said in a note to clients.
Prestige Economics said the rebel victory in Libya could even push up prices if the end of the Gadhafi era inspires uprisings elsewhere in the oil-producing oil countries. "Both Egypt and Libya have seen significant regime change, and the Arab Spring could return in full force throughout the region, disrupting crude oil production significantly in the near term," said Prestige president Jason Schenker.
Oil companies that were active in Libya before the civil war also played down chances that oil production would leap back. On July 29, Eni SpA, the Italian oil giant and biggest foreign oil player in Libya, said it would take a full year to get production back to its old level of 280,000 barrels a day. Still, Eni shares rose by 6.3 per cent Monday.
Another big name in Libyan oil, Spain's Repsol, said it will not send employees back to its Libyan fields as long as unrest continues. Canada's Suncor pulled its employees from its Libyan operation in February (Suncor took a $514-million [Canadian]writedown on those assets in the second quarter). "It is a bit premature" to comment on the rebel push, production prospects, and when expatriate employees will return to Libya, said Kelli Stevens, a spokesperson for Suncor. "We're watching the situation unfold like everyone else.'' For any foreign oil company, security is the big worry; they don't know if forces loyal to Col. Gadhafi are sill roaming the desert with their rocket-propelled grenades.
Even if Libyan exports were to come on stream faster than expected, global oil demand might be more than enough to offset any new supply. In spite of the U.S. sovereign debt downgrade and fears that a fresh recession is imminent, prices have held up remarkably well. New figures indicate that China's oil demand in July rose 7.7 per cent year on year. "The appetite for commodities [in China]appears largely undimmed," Barclays said.
With a file from reporter Carrie Tait in Calgary