Crude oil began the week worrying about another potential big drop in supply - this time from Libya where worries over another Syria-type scenario have risen with outside powers supporting rival armed fractions. However, at a peace summit in Berlin, German Chancellor Merkel announced that countries with interests in Libya had agreed to provide no further military support while the ceasefire lasts.
In Tripoli the UN-recognized executive authority is backed by powerful militias and interest groups, mainly in the west of the country, as well as Turkey and Qatar. The east of the country is controlled by General Khalifa Haftar who heads the Libyan National Army and is supported by Egypt, the United Arab Emirates, Saudi Arabia, Jordan and at times, France and Russia.
The short-lived rally in crude oil at the beginning of the week was halted once the impact of the coronavirus emerged. Adding to the subsequent sell-off was the need from speculators to exit longs that had been accumulated during December’s strong rally. In Brent alone the build in speculative longs during this time amounted to almost a quarter of a billion barrels.
Selling accelerated once $64/b gave way but with geopolitical risks still a significant factor, we see the downside limited to $60/b. Whether we get that low depends on further news from China and whether speculators have reduced positions to a more comfortable exposure. Given the latest developments and crude oil’s inability to find support from geopolitical worries the OPEC+ group will be forced to extent production cuts beyond March. Until either demand picks up or non-OPEC production fails to deliver the expected barrels.