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What Gadhafi's Death Will Mean to Oil Prices


Although it's an emotional and liberating day for the Libyan people, oil investors are looking to December for expansion signals.

The rumors from the town of Sirte are confirmed: the "Libyan-Gadhafian-Whatever you call it" saga is finally over. Revolutionary NTC (National Transitional Council) fighters made a push to take control of the former prime minister's hometown and last stronghold, reportedly discovering him and his underground hideout in the process (Saddam-esque, anyone?). In his speech from the White House's Rose Garden earlier today, President Obama stated, "One of the world's longest-serving dictators is no more," while asserting his view that "the Libyan people now have a great responsibility." As always, my natural reaction is: What happens to crude now?

Oil is certainly down on the day (both Brent and WTI as of 1:00 p.m.) but this is more a function of the cancelation of Angela Merkel's European Financial Stability Facility speech that pushed the equity markets lower (and brought oil along for the ride). European rumors are affecting anything and everything in the markets, thus oil will depend more on Merkel and Nicolas Sarkozy's meeting in Brussels on Sunday, October 23 than on the final chapter of the Gadhafi story.

Before the onset of the revolution that began with peaceful protests in mid-February, Libya was producing over 1.6 million bbl/day (barrels per day). Following the NATO air strikes and ever-present chaotic violence, this figure slowed to a trickle, as low as 45,000 bbl/day in August. As of now, production level estimates are in the range of 300,000 bbl/day. Although the original 1.6 million number may not seem like much in the grand scheme of things (considering that average daily world oil consumption is approximately 87 million barrels per day), Libyan crude is of the highly coveted light sweet variety. As a result, for months, this sharp and sustained reduction propped up the price of Brent crude and contributed slightly to the widening of the Brent-WTI spread over the summer. In addition, although its production makes up less than 2% of world demand, Libya's importance stems from its "proven reserves" statistic of over 40 billion barrels – the largest in Africa and nine largest in the world.

An important day to consider for the fate of Libyan oil: December 14 – the date of an OPEC conference in Vienna, where for the first time, Libya will be represented by a member of its new NTC government.

And who all might this conference impact? Assuming that OPEC will agree to boost Libya's quota, a goal of the new Libyan government, a swift push for increasing production will be in place. In order for the exploration, production and transportation infrastructure to be rebuilt and expanded, companies like Halliburton (HAL) and Schlumberger (SLB) will be looking to take advantage of such necessities. In addition, although companies are slowly beginning to return to the country, as France's Total S.A. (TOT) did in late September, there is major uncertainty regarding the issue of how quickly Libya can return to pre-revolution production figures. As of now, estimates range from 600,000 to 1,000,000 bbl/day within the next year. Should the December 14 conference provide a better understanding on this subject, companies like Hess (HES), Marathon Oil's E&P unit (MRO), Occidental (OXY) and ConocoPhillips (COP) will be more willing to re-enter the Libyan oil market, provided that the new NTC government will be welcoming of foreign entities.

Should production jolt up, pressure on Brent demand should reduce, also allowing Europe to add to severely low inventory and perhaps leading to a shift away from the currently tight-supplied and backwardated forward curve structure.

We will wait to see how the market digests Gadhafi's passing over the next few days, but it seems as if its effect on oil prices will be far less dramatic than expected. Although it is an emotional and liberating day for the Libyan people, his death is more symbolic in nature than impactful on the markets. For all practical purposes, he surrendered the last of his authority after retreating from Tripoli in August.

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