Oil prices soar 3% on Libya production shutdown fears

Hezbollah launches hundreds of rockets and drones at Israel, which responds by striking villages in Lebanon

Storage tanks at Libya's El Sharara oilfield. Reuters

Oil prices surged in evening trade on Monday on fears of a complete halt in Libya's production, as well as an escalation of the Israel-Gaza war.

Brent, the benchmark for two thirds of the world's oil, was trading 2.7 per cent higher at $81.15 a barrel at 4.34pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 2.9 per cent at $77 a barrel.

On Monday, Libya’s eastern government announced the shutdown of all oilfields, suspending production and exports.

Libya, which had a production of 1.2 million barrels per day before the closure of its Sharara oilfield this month, has remained divided since the civil war that followed the 2011 revolution.

The western part of the country is governed by the Government of National Unity, which was established through a UN-led political process ahead of elections scheduled for December 2021.

In the eastern region, a rival government called the Government of National Stability emerged in March 2022, taking control of about three quarters of the country's oil production capacity.

“The Libyan government declares a state of force majeure on all oilfields, vessels, institutions and facilities, and suspends the production and export of oil until further notice,” the Benghazi-based government said.

The Libyan groups are fighting for control of the central bank and oil money.

Meanwhile, in the Middle East, one of the most intense exchanges in more than 10 months of border conflict occurred on Sunday as Hezbollah fired hundreds of rockets and drones at Israel, which responded by hitting targets in several Lebanese villages.

The Iran-backed Lebanese militant group claimed to have struck 11 Israeli military sites, including near Tel Aviv, with more than 320 rockets and drones, as retaliation for the assassination of its senior commander Fouad Shukr in Beirut last month.

Elsewhere, US Federal Reserve chairman Jerome Powell on Friday endorsed easing the central bank’s policies, saying further cooling in the job market would be unwelcome. He also expressed confidence inflation was within reach of the Fed's 2 per cent target.

“The upside risks to inflation have diminished. And the downside risks to employment have increased,” he said.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The Fed has held its target range at 5.25 per cent to 5.5 per cent since last July after aggressively raising rates in response to the US surge in inflation. The next Federal Open Market Committee meeting is expected to be held on September 17 to September 18.

Mr Powell provided no guidance on the size of the coming rate cut, despite speculation of at least one significant reduction before the year ends, but instead left the possibility open for bets on a substantial cut, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.

Meanwhile, the US purchased about 2.5 million barrels of oil for the Strategic Petroleum Reserve, the Energy Department said on Friday.

To date, the Department of Energy has directly purchased more than 47 million barrels of oil for the SPR at an average price of $76.89 a barrel.

Brent has dropped by about 13 per cent since reaching $91 a barrel in April, due to concerns over weakening demand, particularly in China, the world’s largest crude importer, and easing supplies.

China, the world's second-largest economy, is facing challenges linked to a property crisis, sluggish consumer spending and a deceleration in manufacturing.

On the supply side, the Opec+ alliance of oil producers plans to gradually lift voluntary production curbs of 2.2 million bpd on a monthly basis from October 2024 to September 2025.

However, the group has said that the monthly increases in output could be “paused or reversed” depending on market conditions.