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Libyan Pipeline Explosion Drives Prices Higher

On December 27, 2017, a pipeline operated by Waha Oil Company was targeted by armed men who detonated explosives along a pipeline segment. The attack is expected to reduce production by roughly 100,000 barrels per day. At the end of November total Libyan oil production was at 970,000 bpd. Libyan production highs for 2017 reached 1,030,000 bpd.

WTI and Brent crude showed an immediate and severe reaction to initial reports of the pipeline attack. Prompt month contracts for WTI jumped from intraday lows near $58.40 to $60, roughly a 2.7% gain within a few hours. Prompt month Brent futures traded from intraday lows near $64.50 to $66.52, over a 3.0% gain.

The price gains seen surrounding the Libyan pipeline outage look excessive when compared to price action from the Forties outage. 62 hours from the initial Forties report, WTI futures traded around $58.40. This marked a $2.00 or 3.5% gain from pre-event lows near $56.40. The Libyan pipeline outage has seen price gain almost $1.50 or 2.5% from pre-event lows near $58.50. The Forties outage began on December 7, 2017, with reports indicating a leak had formed on the pipeline. On December 11, 2017, the pipeline was shutdown completely and repairs were estimated to take 2 to 4 weeks to complete. The shutdown removed roughly 450,000 bpd of production from the global market. In comparison, the Libyan pipeline outage has removed between 75,000 and 100,000 bpd of production from the global market. Pipeline repairs have an estimated completion of one week. Given the drastic difference in capacity between the Forties and Libyan pipelines, the market may have over reacted following the first reports of the pipeline explosion. That being said, the market may be pricing in additional threats to Libyan production given the nature of the outage. Libya could face additional reduction in oil production if local armed groups escalate attacks on pipelines.