Oil markets have failed to build any kind of sustained momentum over the past couple of weeks, with persistent fears of a hard landing for the U.S. economy outweighing supply disruptions. Crude oil futures surged more than 3% on Monday after Libya's rival eastern government said it is shutting down oil production and exports, adding to gains made the previous week when Fed chair Jerome Powell indicated a start to interest rate cuts in September.
Unfortunately, oil prices have pulled back, with Brent crude for October delivery trading at $79.23/barrel in Wednesday’s session down from its weekly peak at $81.47 on Monday while WTI was quoted at $75.15/barrel after hitting $77.54 on Monday. Further, Brent spreads have widened significantly; October-November backwardation has increased by $0.51/bbl w/w to $1.07/bbl at settlement on 26 August, November-December backwardation has increased by $0.43/bbl to $0.85/bbl who;e December 2024-December 2025 backwardation has increased by $1.08/bbl to USD 4.13/bbl.
Oil Crisis in Libya
Oil prices surged on Monday after Libya's eastern government called a force majeure on all oil production and exports, which could remove up to 1 million bpd of crude from the markets. Oil was already trading higher after Israel sent more than 100 warplanes to take out thousands of Hezbollah missile launchers on Sunday. However, the Libya development is much more significant to oil markets because it represents "real barrels lost, effectively tightening the physical market for as long as the Libya crisis lasts, UBS analyst Giovanni Staunovo has told Bloomberg.
In 2022, a deal between Tripoli-based Prime Minister al-Dbeibah and the Benghazi-based warlord Khalifa Haftar reunified the central bank and put it (loosely) under Tripoli’s control, while a Haftar loyalist took control of the state oil company. The eastern and western factions have been competing over access to state revenues, with eastern factions recently shutting down oil flows in response to the Tripoli-based Presidency Council's bid to oust CBL governor Sadiq al-Kabir.
Periodic instability in Libya's oil output has been a recurring feature since 2011’s First Libyan Civil War, with commodity analysts at Standard Chartered estimating that it has led to a loss of just over 4 billion barrels of output and cost the North African country $320 billion in lost revenue.
The past month has seen some sharp oil price swings but no sustained momentum, raising questions over the quality of price discovery involved in the cycles. According to StanChart, both price cycles over the past month have been primarily due to spillovers from interest rates markets and a seasonal dominance of algorithmic trading. However, other than the Libya oil shutdown, there have not been major changes to market fundamentals to justify the large oil price fluctuations. According to the experts, negative positioning on oil relative to neutral positioning on copper reflects heightened fears of a hard landing in the U.S economy, as well as a bearish outlook for 2025. The bearishness is hard to justify considering that the cumulative fall in U.S. crude oil inventories over the past eight weeks clocked in at 34.7 million barrels, an average of 620 thousand barrels per day (kb/d).
Mixed Bag for Natural Gas Prices
Natural gas markets have been mixed, with European gas markets bullish while U.S. markets have continued to lag. European natural gas futures have managed to hold steady close to €40 per megawatt-hour due to supply concerns related to Norway's annual maintenance and the Ukraine-Russia conflict. Maintenance activity lowered Norwegian gas nominations by 10 million cubic meters per day, affecting major pipelines such as Franpipe, Emden, and Dornum. Nevertheless, Russian gas continues to flow to Europe, and regional storage is at around 92% capacity, exceeding the EU's November target by over two months.
In contrast, U.S natural gas prices have weakened again, with front-month Henry Hub (September) falling below $2 per million British thermal units (mmBtu) for the first time in three to trade at $1.93/MMBtu in Wednesday’s session. However, the Henry Hub forward curve is in a steep contango, with the December 2024 to February 2025 contracts all settling above $3.00/MMBtu, with inventories remaining relatively flush. U.S. gas prices were further depressed over the past week by weather forecasts that imply a decline in cooling demand in key consuming regions over the next two weeks, coupled with a lack of significant hurricane activity near the offshore Texas gas fields.
By Alex Kimani for Oilprice.com
