The Fundamentals Of Fear

Another smackdown in oil based on fear fundamentals not actually supply and demand. The oil market gave into anxiety instead of focusing on fundamentals that in a less fearful world would be supportive. Oils late-day dive came after British Prime Minister Theresa May postponed a key parliamentary vote on her Brexit deal and sank oil and UK oil companies. This comes as we have ongoing doubts and jitters about the U.S. trade dispute with China. Yet, from an oil reality standpoint, we have a lot of supportive things that the market seems oblivious to.

For example, despite China slowdown fears in November, they imported a record amount of oil. China’s crude oil imports averaged more than 10 million bpd for the first time ever in November, averaging an all-time high of 10.43 million bpd last month, up by 8.5 percent compared to November 2017. The market ignored the fact that Libya’s largest oil field was shut in after an armed group over the weekend took over and shut it in. Libya declared a state of force majeure after the shutdown of the Sharara field. Bloomberg reports that this will result in a production loss of 315,000 bpd, the state energy producer National Oil Corp. said on its website. Sharara is operated by a joint venture between the NOC and Total, Repsol, OMV AG, and Equinor, known formerly as Statoil. The halt will also reduce Libya’s output by an additional 73,000 bpd at the El-Feel, or Elephant, field due to its dependence on Sharara for electricity supply, the NOC said Monday. El-Feel is operated by a joint venture between Eni and the NOC. Force majeure is a legal clause protecting a party from liability if it can’t fulfill a contract for reasons beyond its control.

This adds to the production losses from OPEC that along with Russia has agreed to cut by 1.2 million barrels a day. Alberta cut by 300,000 barrels plus per day and now we are losing another 315,000 from Libya. While some doubt OPEC and Russia’s commitment to compliance, they really should not. Already private tanker services are suggesting that the Saudis have already reduced oil exports significantly.

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