Oil prices dropped to their lowest levels this year after reports suggested that Libya might soon resume full production, raising concerns about an oversupply in the market amid weak global demand.
Brent crude, the international benchmark, fell by as much as 5% to $73.67 on Tuesday, its lowest point since December and the first time it has dipped below $75 since January. The U.S. benchmark, West Texas Intermediate (WTI), also declined, sliding 4.5% to $70.25.
The price decline followed a Bloomberg report indicating that Sadiq al-Kabir, the central bank governor at the center of a dispute between two rival factions, said there were “strong” signs of a compromise. Investors fear that Libya, which had shut down about 60% of its 1.2 million barrels per day of oil production last week, could soon restore full output. This adds to concerns about weak demand from China, the world’s largest oil importer.
Crude prices have been volatile in recent weeks as investors assess the impact of the ongoing tensions, which were expected to last for several months. Libya accounts for less than 1% of the world’s daily oil output.
Libya’s eastern government, which lacks international recognition, halted large portions of the country’s production and exports. Analysts believe this move is part of a power struggle between factions over al-Kabir’s position. The central bank controls billions of dollars in oil revenue, Libya’s primary source of income.
Abdul Hamid Dbeibeh, the prime minister of the Tripoli-based government in the west, has been trying to replace al-Kabir, who is supported by the eastern parliament and Khalifa Haftar, the warlord who controls eastern Libya.
Some traders and analysts speculated that global supply might be sufficient to offset the shortfall, given weaker-than-expected demand from China. However, there is also speculation that the OPEC cartel might delay its planned production increase in the fourth quarter.
The International Energy Agency recently forecasted that crude demand growth would slow at the end of the summer U.S. driving season. The agency noted that a contraction in China had limited demand growth during the second quarter.
“Despite a significant portion of Libyan oil production being offline, oil prices are falling as investors remain focused on demand concerns, particularly the worsening economic situation in China,” said Ehsan Khoman, head of commodities at MUFG.
However, prices have been supported by speculation that OPEC+ producers may delay planned production increases in the fourth quarter, as Saudi Arabia, the cartel’s leader, needs to finance its ambitious infrastructure projects.
“The market is divided on whether the producer group will resume a battle for market share or continue to act cautiously regarding supply increases,” Helima Croft, head of commodities research at RBC Capital Markets, wrote in a note this week. “We remain in the camp that expects continued caution.”