Oil prices fell to their weakest levels this year following a report that Libya may shortly restore full production, adding to fears that weak global demand will create an oversupply on the market.
Brent crude, the international benchmark, fell as much as 5 per cent to $73.67 on Tuesday, its weakest level since December and the first time it has slipped below $75 since January. The US equivalent, WTI, slid by 4.5 per cent to $70.25.
The drop in prices came after Bloomberg reported that Sadiq al-Kabir, the central bank governor at the centre of a dispute between two rival factions, said there were “strong” indications of a compromise.
Investors fear that Libya, which shut down around 60 per cent of its $1.2mn barrels a day of oil last week, could shortly restore full output, adding to concerns over weak demand from China, the world’s largest importer of oil.
Crude prices have been volatile in recent weeks as investors weigh the impact of the tensions, which was expected to last several months. Libya accounts for less than one per cent of the world’s daily output.
The country’s eastern government, which is not recognised internationally, shut down large parts of the country’s production and exports, which analysts said was part of an escalating power struggle between the factions over the position of al-Kabir. The central bank holds billions of dollars in oil revenue, which is Libya’s only source of income.
Abdul Hamid Dbeibeh, prime minister of the Tripoli-based government in the west, has been trying to replace al-Kabir, who is backed by the east-based parliament and Khalifa Haftar, the warlord who controls eastern Libya.
Some traders and analysts speculated that there was enough global supply to make up the shortfall, as demand from China has been weaker than expected. But there has also been speculation that the Opec cartel will delay a plan to increase production during the fourth quarter.
The International Energy Agency last month predicted that growth in demand for crude would soften at the end of the summer US driving season. It said a contraction in China had helped limit growth in demand during the second quarter.
“Notwithstanding that a large share of Libyan oil production is offline, oil prices are capitulating as investors remain laser focused on the demand-side of the equation with apprehensions that China’s economic malaise is worsening,” said Ehsan Khoman, head of commodities at MUFG.
However prices have been supported by speculation that Opec+ producers may delay production increases that are due in the fourth quarter because Saudi Arabia, the cartel leader, needs to finance its ambitious infrastructure projects.
“The market has been divided over whether the producer group is poised to relaunch a battle for market share, or if it will maintain cohesion and continue to exercise caution about supply increases,” Helima Croft, head of commodities research at RBC Capital Markets, wrote in a note this week. “We still remain in the latter camp.”