AFKI Commodities Report: Libyan Supply Prospects Pressure Brent Crude

AFKI Commodities Report: Libyan Supply Prospects Pressure Brent Crude

The prospect of increased Libyan supplies pressures crude prices while palladium rallies further on new sanctions against Russia. Gold dips to near a four-week low before rebounding. Among softs, raw sugar and arabica coffee slip to five-month lows while North American grind data is positive for cocoa markets

Brent crude oil prices have come under further pressure this week as the prospect of rising Libyan supplies in a global market already flush with oil overshadowed renewed violence in the North African country.

Libya’s state-owned National Oil Corp. earlier this week issued a tender to sell 1 million barrels of crude from its eastern Ras Lanuf terminal for end-July loading, according to a Reuters report. If successful, this would be the first sale from Ras Lanuf in nearly a year. Earlier this month, rebel forces handled back control of the terminal together with a second terminal – Es Sider- to the government after blockading the two facilities for nearly 12 months.

Libya’s crude oil production is reported currently to be running at almost 600,000 barrels per day, its highest output volume since early last summer. At the height of the rebel blockade and militia protests, output dipped as low as 150,000 barrels a day.

However, violence escalated again at the weekend as rival militia battled for control of Tripoli airport, renewing concerns about whether Libya can soon increase its crude exports.

Brent futures for August delivery on London’s ICE Futures Europe exchange fell to less than $105 a barrel briefly on July 15, marking a 3½-month low, before clawing back some of the losses to settle at $106.02 a barrel. The front-month August contract expired on July 16. The new front-month, September finished, at $107.17 a barrel on July 16.

The renewed fighting in Libya, more violence in north and west Iraq as well as continuing tensions in Ukraine are putting a floor under Brent, analysts said.

Brent crude prices briefly hit a nine-month high of $115.71 in June after the advance of ISIS-led insurgents in the north and west of the Iraq triggered deep concerns that oil supplies from OPEC’s second-largest producer could be disrupted. But prices subsequently retreated on expectations the country’s main oil production and export facilities in the south will remain safe from the violence.

The Paris-based International Energy Agency (IEA) in its July Oil Market report, released July 11, said Iraqi crude production fell by about 260,000 barrels a day to 3.17 million a day in the past month after fighting shut the country’s biggest oil refinery at Baiji and reduced output at the northern Kirkuk oilfield. However, the energy agency expects shipments from Iraq’s south to rebound to around 2.6 million barrels a day this month from 2.42 million in June, “barring technical problems”.

IEA, however, trimmed its estimate of 2014 global oil demand by 130,000 barrels a day to 92.7 million barrels, citing weaker-than-expected mid-year economic data. The energy agency expects global oil demand growth to accelerate to 1.4 million barrels per day in 2015 from 1.2 million barrels this year, as macroeconomic conditions improve.

U.S. crude rebounded at midweek, having slipped below the key psychological $100 a barrel level on July 15 for the first time since May, largely on the back of easing Iraq concerns. The West Texas Intermediate (WTI) for August delivery on the New York Mercantile Exchange (Nymex) closed the day at $99.96 a barrel, down $1.95 on the previous finish.

But WTI crude oil prices moved higher again on July 16 after U.S. government data showed the country’s crude inventories fell sharply last week as well as news of more positive economic data from China.

Data from the U.S. Energy Information Administration (EIA) showed the country’s crude stocks declined 7.53 million barrels to 375 million barrels in the week ending July 11. Inventories at the key Cushing, Oklahoma storage hub also fell, dropping by 650,000 barrels to 20.3 million.

Earlier the same day, China’s statistics bureau reported the country’s gross domestic product (GDP) grew 7.5% in the three months to June 30 compared with the same year-earlier period. The growth is seen widely as a result of government stimulus measures. China is the world’s second largest oil consumer after the U.S.

Nymex’s WTI for August fiished on July 16 up $1.24 at $101.2 a barrel.

At the time of writing, crude futures prices in New York and earlier in London were heading higher on news reports that a Malaysian Airlines plane had crashed over Ukraine not far from the Russian border. While newswire reports quoting Ukraine officials said the plane was shot down, the cause has yet to be confirmed.  Brent crude for September touched a high of $108.21 a barrel following reports of the airline crash, while WTI for August had hit a high of $103.59 a barrel at the time of writing.

Palladium’s rallies to fresh 13½-year high

Palladium climbed further this week, reaching a new 13½-year high following the imposition of a fresh set of economic sanctions by the U.S. administration on Russia on July 16. These latest sanctions by the U.S. follows a less-onerous sanctions’ package by the E.U. The sanctions serve as the latest shot across the bow to Moscow for its involvement in Ukraine and its failure to take concrete actions to help defuse the conflict.

The U.S. measures are targeted largely against key areas of Russia’s energy and financial sectors and are intended to limit the access of two key Russian banks (Gazprombank and VEB) and two key energy firms (Novatek and Rosneft) to U.S. sources of finance, the U.S. Department of the Treasury said in a July 16 press statement. “This step,” the statement read, “will close the medium- and long-term U.S. dollar lending window to these banks, and will impose additional significant costs on the Russian government for its continued activities in Ukraine”.

The sanctions fuelled palladium buying by investors in what is already a market worried about a record supply shortfall this year. London group Johnson Matthey, for instance, last month projected a 1.6 million ounce global deficit for palladium in calendar 2014 and some analysts are projecting an even greater supply deficit.

Russia is the world’s largest supplier of palladium, accounting for close to 39 percent of world supply last year. The latest round of sanctions, particularly those of the U.S., have revived fears that Russia may try to retaliate by limiting its palladium export shipments.

Palladium supplies from South Africa, the world’s second largest producer, have been disrupted as a result of a five-month strike in the country’s platinum mining belt which ended in June. The three affected producers – Anglo American Platinum, Impala Platinum and Lonmin – have warned it will take several weeks to ramp up platinum group metals’ output to normal levels again.