Libyan confict spells bad news for crude oil prices

Escalating conflicts in Libya are thwarting a revival of oil output from Africa's largest crude reserves.

While the Libyan government said in early July that traders could buy cargoes again from Es Sider and Ras Lanuf, the biggest blocked ports, neither has shipped anything. In Tripoli, the capital, firefighters are still battling a blaze at a fuel-storage depot caused by clashes between militias that have been struggling for political power in the three years since the ouster of dictator Muammar Gaddafi.

The U.S. State Department evacuated its Libyan embassy on July 26 because of the violence, while the U.K. and Canada also withdrew diplomatic staff.

Brent crude for September delivery traded at $107.27 a barrel as of yesterday on the ICE Futures Europe exchange, compared with $107.62 for the October contract and $107.80 for December. Prices for immediate delivery have traded at a discount to later ones for 17 straight sessions, the longest stretch since the end of 2010, exchange data show.

On July 16, the last day of trading for the August contract, the discount to September futures was $1.32 a barrel, prompting firms including Bank of America Corp. and Energy Aspects Ltd. to speculate it would be profitable for traders to buy crude at the current price, store it, and sell later.

The clashes, between an anti-Islamist militia aligned with a renegade general and pro-Islamists, are a spinoff of violence in the eastern region between Islamist militants and their opponents, headed by General Khalifa Haftar. Rivalries between militias, which have often doubled as national security forces, have undercut the already-weak central government’s ability to exert influence and stabilize the nation.

Production in Libya reached 1.7 million barrels a day in 2008 and was almost 1.6 million before Gaddafi’s death in 2011. Output has tumbled since then as unrest and political instability increased. Earlier this year, Libya became the smallest supplier in the Organization of Petroleum Countries and shipped 300,000 barrels a day in June, according to data compiled by Bloomberg.