The resurrection of Libya and the problems of China are creating a glut of oil on the market, according to the IEA

Oil futures seem to be moving away little by little from the 100 dollars in one of the most convulsive years for this raw material. The uncertainty is immense on the demand side () as well as on the supply side (sanctions on Russia and production problems in large producers). As OPEC pointed out in its monthly report, the oil market shows a schizophrenic behavior. After months of deficit (less oil was produced than was consumed), it now appears that the market has entered a notable surplus due to the slowdown in the economy and the revival of production in Libya.

Brent oil futures have dipped below $90 a barrel in early September, the lowest level since January this year and more than $34 below June highs. This price drop can be called historical, according to the data handled by the IEA.

“This is the largest 90-day drop since the March-April 2020 (COVID) oil crash. Excluding the pandemic, this correction is second only to the market crashes in 2014-15 and 2008-09. However, the diesel and jet fuel markets remain exceptionally tight, as reflected in current prices.

Why is oil falling?

The big question is why oil falls so much if the war in Russia is still very much alive and the Western embargo on Russian oil is getting closer. The answer lies in the uncertainty of the economy () and in the recovery of supply in some countries with which little was counted, as is the case of Libya, which lives in perpetual instability. This is also a risk, since the oil produced today by the African country does not represent a safe flow of crude oil.

The market is expected to remain in excess supply in the second half of 2022, with about 1 mb/d of excess supply, and more or less balanced in 2023. The key is a more contained demand and the return Libya’s total, which has surprised the markets by pumping much more oil. The African country has almost doubled its crude production in a month, going from a production of 600,000 barrels per day to 1.08 million barrels per day.

“Libya represented the largest single increase within OPEC+ in August after the state-owned National Petroleum Corporation (NOC), under new management, reopened oil fields and terminals in mid-July. Production increased by an average of 1.08 mb/d and the NOC assures that production had exceeded 1.2 mb/d by the end of August. However, the North African country’s politics remain contentious and rival groups are still clashing,” they warn from the IEA.

Supply is expected to exceed demand in the second half of 2022

On the other hand, “a deteriorating economic environment and the recurring confinements due to covid in China continue to weigh on market confidence,” say experts from the International Energy Agency. Despite everything, the forecasts on consumption are maintained.

The IEA predicts that world oil demand will grow by 2 million barrels per day (mb/d) in 2022 and by 2.1 mb/d next year. Jet fuel dominates growth, while trucking demand declines. Robust use of oil for power generation in the Middle East and Europe due to record natural gas and electricity prices is providing unexpected support to the crude market.

diesel deficit

However, derivatives markets, especially diesel, are expected to remain in deficit due to a lack of refining capacity outside of China. “Global diesel markets are very tight due to strong demand, which has drastically reduced its foreign sales.”

In addition, recently introduced taxes in India have discouraged exports from Asia’s biggest supplier, according to the IEA. Since July 1, Indian exports of diesel and kerosene are subject to export duties. Since September 1, tariffs have more than doubled to $12 and $15 a barrel for diesel and kerosene, respectively.

Until now, the EU has largely kept Russian diesel import volumes at around 600,000 barrels per day, but from next February these volumes will need to be replaced by other sources. Europe’s salvation is expected to come from three major refinery projects in Kuwait, Nigeria and Mexico that will come on line by the end of 2023, leading to increased diesel production.

On the other hand, the IEA believes that “the proposed price cap mechanism should also work to ensure that the overall supply of diesel for the global market is met and that European importers can switch to flows from the US, the Middle East and India Otherwise, and assuming Russia is unable to ship diesel in significant quantities outside the price cap, European, Latin American and African importers could be competing for a smaller pool of available flows.”