Oil prices drop despite Libya supply concerns and positive US economic data

Oil prices pared back gains on Friday to close the week lower, despite supply disruption concerns in Libya and positive economic data from the US, the world’s largest economy.

West Texas Intermediate, the gauge that tracks US crude, fell 3.1 per cent to $73.55 per barrel at the market close on Friday.

Brent, the benchmark for two thirds of the world's oil, dropped 1.43 per cent to $78.8 a barrel on Friday, notching its first back-to-back monthly loss this year.

Both benchmarks on Friday were initially headed for a weekly gain as supply concerns continue to outweigh demand fundamentals on sluggish economic growth in China, the world's second-largest economy and a top importer of oil.

However, markets were weighed down as traders considered a Reuters report that Opec+ is expected to proceed with a planned output hike from October amid the Libyan outages and pledged cuts by some members to compensate for overproduction counter the impact of sluggish demand, according to the Reuters report, citing six sources from the producer group.

“Libyan crude production continues to be disrupted by an ongoing political stalemate between the rival governments in the country’s east and west over control of the central bank,” Singapore-based oil consultancy Vanda Insights said in a research note on Friday.

Libya remains split between the UN-recognised government in Tripoli, led by Prime Minister Abdul Hamid Dbeibah, and a rival administration in the east, supported by military commander Field Marshal Khalifa Haftar. Most of Libya's oilfields fall under his control.

On Monday, Libya’s eastern government announced the shutdown of all oilfields, suspending production and exports. This follows a decision by a rival administration in Tripoli to remove central bank governor Sadiq Al Kabir, whose role was to distribute the country's oil revenue between the two governments.

Mr Al Kabir and other senior bank staff are reported to have been forced to leave the country due to security threats, according to the Financial Times on Friday.

More than half of Libya's oil production, or about 700,000 barrels per day, was offline on Thursday and exports were halted at several ports following a standoff between rival political factions, according to Reuters.

Libyan production losses could reach between 900,000 and 1 million barrels per day and last for several weeks, it reported citing Rapidan Energy Group.

The country’s oil production reached 1.17 million bpd in July, data from Opec’s monthly oil market report shows.

Escalation in tensions between Israel and Lebanon’s militant group Hezbollah as well as positive economic data from the US that could boost demand in the country are also supporting oil prices.

US economy boost for demand

The US economy grew faster than initially thought in the second quarter amid strong consumer spending, the latest data from the Commerce Department's Bureau of Economic Analysis show.

The country recorded gross domestic product growth of 3 per cent annually in the last quarter, up from an initial estimate of 2.8 per cent rate reported last month.

“The positive economic growth surprised analysts and alleviated worries about a significant downturn,” Priyanka Sachdeva, senior market analyst at Phillip Nova, said. “With the US being the top consumer of oil, a stronger US economy suggests that there will likely be consistent demand for crude oil.”

Meanwhile, Iraq assured Opec of its full conformity with oil production guidelines to stabilise markets following the visit of Opec’s secretary general to the country this week.

“Iraq presented clear and determined steps to compensate for overproduced volumes and gave assurances that it would achieve full conformity going forward,” an Opec statement said on Thursday, citing its secretary general Haitham Al Ghais.

Iraq is the second biggest oil producer within Opec group after Saudi Arabia, with an output of 4.25 million bpd in July.

Kazakhstan, which is part of Opec+ group that is playing a key role in stabilising oil markets also assured its “commitment to fulfilling its obligations” and adhering to output guidelines.

Iraq and Kazakhstan compensation plans

Earlier this month, the two countries updated their compensation plans for their overproduced volumes for the first 7 months of 2024 which totalled about 1.4 million bpd for Iraq and 699,000 barrels per day for Kazakhstan, according to Opec.

Iraq would cut 90,000 bpd this month and 95,000 bpd next month and the same volume in October. It would also reduce production by 100,000 and 110,000 for the months of November and December. It will also continue to cut output every month till September next year.

Kazakhstan also outlined its compensation plan starting from August this year to September next year for overproducing.

Opec+ group, which includes Saudi Arabia and Russia, in June agreed to extend output cuts of 3.66 million bpd, which were initially planned to end this year, until the end of 2025.

At the same time, the additional 2.2 million bpd voluntary production cuts of eight Opec+ member states were extended by three months until the end of September.

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