(EnergyAsia, October 9 2014, Thursday) — North Sea Brent crude oil prices have been on an extended weak run trading below US$100 a barrel since September 5, even slipping below US$94 to its lowest level in more than two years. Ironically, Brent began falling after hitting a peak of US$115 a barrel on June 19 when the Islamic State (ISIS) emerged as the latest terror group to threaten the Middle East along with its oil and gas industry.

According to the US Energy Information Administration (EIA), Brent had traded within a narrow US$5/barrel band between US$107 and US$112 per barrel for 13 consecutive months through July 2014.

During this time of record-low price volatility, it observed that substantial disruptions to OPEC supply were offset by increases in US production and weaker-than-expected global demand excluding the US.

More recently, the return of Libyan oil production to the market, combined with the weakening outlook for global oil demand, has put sustained downward pressure on prices.

“The return of significant Libyan crude oil production – which has surpassed market expectations in both volume and longevity – has been an important contributor to downward pressure on Brent prices,” said the EIA.

Despite the deterioration of the security situation in Libya, with the internationally recognised government having fled the capital, crude oil production increased from 200,000 b/d in June to almost 900,000 b/d by mid-September.

In mid-September, violence shut production at Libya’s largest oil field, reducing the war-torn nation’s total production to around 600,000 b/d, although initial reports indicate the damage was not extensive and the Libyan National Oil Corporation reported production had resumed shortly after to almost 800,000 b/d.

The sustained increase in Libyan production over the summer weighed on an already well-supplied light sweet crude market in the Atlantic Basin. This despite the fact that Libya’s recent production has not come close to the level of 1.65 million b/d in 2010 and 2011, just before the Arab Spring.

Over the past several years, the US has significantly boosted light sweet crude production to help significantly reduce light sweet crude imports into the country. Those reduced imports, which were sourced primarily from Africa, became available to replace Libyan production lost to civil war and subsequent unrest, said the EIA.

While Libyan production was disrupted, supply and demand in the Atlantic Basin was relatively balanced. However, as Libyan production has returned, and remained online, the price of Brent has fallen.

While the return of significant Libyan production has been an important factor putting downward pressure on the Brent price, weakening demand, particularly in Europe and Asia, is also important.

Economic growth in 2014 outside of the US has been slow, and some recent data releases appear to confirm lower-than-expected growth, particularly in Asia and Europe.

China, the largest contributor to forecast increases in global petroleum demand this year, reported that industrial production has risen at the slowest pace since 2008. Further, Chinese oil demand earlier this year appears to have been supported by the purchase of strategic crude oil stocks rather than by oil use related to economic growth.

In Europe, the OECD has reduced expectations for economic growth through 2015 after data showed second quarter 2014 GDP contracted in Germany and Italy and stagnated in France. In addition to the weaker economy, which has been the primary factor weighing on crude demand, European refineries are facing increased competition from US and Russian refineries, causing them to reduce utilisation rates and demand for Brent crude.

The EIA also noted the impact of near-term seasonal market conditions such as substantial refinery turnarounds in the US, Europe and Asia in September and October that have reduced demand for crude. The International Energy Agency (IEA) expects global refinery crude inputs to decline by 1.4 million b/d in September and by a further one million bb/d in October before recovering in November and December.

The combination of added Libyan production, weakening global economic conditions, and seasonally low demand, each significant in its own right, has caused Brent prices to decline below the narrow band in which it has traded and has helped push near-term prices below longer-term prices (contango), which typically signifies weak near-term market fundamentals, encouraging inventory builds.

Factors that might help Brent’s recovery

The EIA cited several factors that could help reverse oil’s current bearish landscape, starting with the completion of seasonal refinery maintenance before the end of the year to boost crude demand.

On the supply side, there remain significant geopolitical risks including heightened tensions, and in some cases open warfare, in key producing regions.

Saudi Arabia, which recently cut production by 400,000 b/d, could be forced to make further reductions. Earlier in 2014, near-record Saudi production had helped offset high levels of OPEC supply disruptions, but the return of significant Libyan production partially alleviates the need for those barrels.

Additionally, the EIA said the end of Saudi peak seasonal demand for summer power generation frees up crude that was previously being used domestically, lowering the impact of reduced production on the nation’s crude exports.