Oil Price: clashes in Libya put yet another damper on supply sentiment

source: tradingeconomics.com

The price of crude oil that fell steeply during the last three weeks is steadily picking up the upward momentum again, buoyed by the spectacle of a series of favorable conditions.

The latest that worries the markets is the spectre of war in Libya again: the clashes between two governments left 23 dead and many wounded on Saturday, raising the fear of yet another full-blown war. 

In direct proportion to the prevailing tension, the production of crude oil in Libya has been in steady decline as shown by the above figure; the latest fighting will potentially make it worse that in turn severely affects the global supply of crude oil at a crucial time for the global economy. 

In addition, the prevailing security vacuum could be an ideal breeding ground for the militant outfits like Al-Qaeda and ISIS in the North African country that has the largest crude oil reserves in the entire region.

The clashes in Libya comes in the wake of the concerns expressed by the oil producers about the estimated demand of the commodity in the short term.

The OPEC+, for instance, is seriously considering a cut in production, citing the dwindling demand, something that still exists in the hypothetical realm; the fear of widespread recession engulfing major economies is real, though.

In addition, the price of LNG, liquified natural gas, is skyrocketing with the price exceeding $9.35; it has more than doubled from what it was last year at the same time; if the trend continues, it will hit above $10, triggering off major problems on economic front - in addition to what already exist.

The steep rise of LNG is forcing many industrialists to switch to crude oil as a substitute that in turn increases the demand of crude oil; this development partially account for the price of crude oil remaining close to $90, without crashing to $80 as analysts feared.

Having failed to get the OPEC+ on board in its ambition to increase the oil production, the Biden administration appears to be contemplating on many other options, despite the room for maneuver being very limited.

In this context, the enthusiasm shown by the US administration in reviving the JCPOA, 2015 Iran nuclear deal, is understandable. Although both sides involved in the tricky, lengthy negotiations project an imminent success, two sides still appears to be poles apart when it comes to reaching a lasting agreement. 

In addition to the removal of all sanctions against the country, Iran has been demanding a resolution that is independent of the party in power at the White House; as far as Iran is concerned, it is a case of once-bitten-twice shy.

The powerful Republicans, for instance, are dead against giving too many concessions to the Islamic republic, because of its support to the militant groups like Hamas and Hezbollah; the former say Iran destabilizes the region by financing these groups. 

On Iran's part, it has never shied away from its commitment to boost the coffers of the militant groups in the region. On the contrary, Iran is bragging about the power of these groups, thanks to the steady flow of weapons and of course, funds. 

Iran is particularly watching the next move by President Trump, who unilaterally cancelled the JCPOA and reimposed sanctions against Iran in 2018, dealing a huge blow to the Iranian economy. 

If President Trump declares that he will run for the office in 2024, the collective effort by the signatories to the JCPOA will be on backfoot again, unless the former announces a seismic policy shift; Iran will harden its stand in demanding a cast-iron guarantee that the fate of the agreement will not be determined by the occupier of the White House.

The relations between the Arab neighbours and Iran, meanwhile, shows some improvement: the UAE announced recently that it would restore diplomatic relations once again; Saudi Arabia is contemplating a similar move, according to the Iranian media; in response, Houthi attacks against the Kingdom and the UAE have almost ceased in the recent weeks and the Iran-brokered ceasefire in Yemen between rival fractions appears to be holding.

In short, the Gulf Arab countries do not appear to be opposing the revival of the JCPOA with the same vigour that they used to do when President Biden first started the negotiations on the revival that can be accounted for by the thaw in the relations between Shia Iran and Sunni Arab neighbors. 

In this context, the only significant opposition against the revival of the JCPOA stems only from the usual suspect - Israel; Israel defense minister is already in the US to voice its concern about the revival without a verifiable guarantee from Iran about its subdued nuclear ambitions.

All in all, the possibility of oil price hitting below $80 in the current circumstances is highly unlikely; very high commodity prices, meanwhile, are well on course to inhibit the growth of the major economies and breed social unrest in many different ugly forms - unless you are an oil producer, of course.