Barclays: Parleys with foreign oil firms may get knotty in Libya

Now that it appears that the Gaddafi era is drawing to a close, the key question is how will the Benghazi-based National Transitional Council (NTC) govern Libya? Its victory was facilitated by a substantial NATO airpower, and it could be very difficult for it to govern Libya without international assistance.

“Once this difficult task is overcome, the second task will be to negotiate with foreign oil companies the terms of production-sharing agreements for investments and operations in new and old oilfields (and, in some cases, re-negotiate deals already signed by the current Libyan government), which will be more complicated than the market expects.” said a Barclays report.

In Barclays’ view, the problems of Libya will not necessarily be solved by the departure of Gaddafi; indeed, that might just be the start of some long-lived difficulties. Barclays expect the oil market to likely function on the basis of selling the headline before buying the later reality at more leisure. A sudden wave of market bearishness, in the expectation of a swift return of production and then a further wave of extra production, is a view likely to be given up gradually as the new reality proves to be far more complicated.

Much like most of the economic data, OECD oil demand has slowed but remains more tractable compared with 2008. Moreover, the structure of the demand composition of the oil market is also significantly different now; it is really the scale and speed of non-OECD demand increases that makes a significant difference to the global picture.

The supply side of the market is performing far more poorly than three years ago, and Libya remains out of the market. Further, there is a strong asymmetry on the supply side in that quantities tend to respond faster to prices that are sharply lower than sharply higher.

Finally, countries in the Gulf are pumping significant amounts of money into social programmes to keep unrest at bay and therefore need to maintain fairly elevated oil prices to meet increased budget needs.

Therefore, the threshold for active producer involvement in the market is some $20-25 higher, lending support to an oil price of about $90-100/bbl – this perhaps would be one of the biggest differences between 2011 and 2008 when it comes to determining a potential soft floor for prices, Barclays said. 

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