By: A. Saucer (asaucer@mobiusriskgroup.com)

After a long period of uncertainty, Libyan crude production is back. This follows a surprising permanent cease-fire agreement between two warring factions on October 23rd (read about it here). In recent weeks, virtually all closed oil fields and associated crude export terminals have seen their force majeures lifted. The final piece of the puzzle was the return of the el Feel field and its 70,000 bpd of output. Libyan production was near zero in August, but averaged 450,000 in October and is rapidly closing back in 1 million bpd (pre-Jan 2020 blockade levels).

Another positive sign of a possible long-term diplomatic solution in this decade-long conflict is the UN-backed peace talks in the town of Ghadames. These peace talks occurred on November 2nd and were the first direct talks between the GNA (Government of National Accord) and the LNA (Libyan National Army) since September. These were also the first peace talks held on Libyan soil in years. 

The focus of the Ghadames talks was the practical implementation of the recently agreed to cease fire between the two sides. The talks concluded with an agreement and a framework to implement the UN-backed ceasefire. This momentum seems to have carried over into the next round of talks in Tunisia, as both sides seem to want to signal their optimism about the new political solution.

Libyan production averaged 800,000 bpd during the first week of November and was nearing 1 million bpd today. Libya’s state energy company, National Oil Corp, is targeting production near 1.3 million bpd by the beginning of 2021. This is quite a jump from the August low-water mark near zero and has caught many in the market off guard. A few months ago, the odds of a successful Libyan ceasefire were extremely low. 

Libya’s rapid recovery is a bearish surprise in a year full of surprises and demand uncertainty. This production comes at a time when worries about a new surge of COVID-19 cases worldwide could hurt demand. It is yet another material challenge for OPEC to manage alongside the still long list of uncertainties, both on the supply and demand side, heading into 2021. 

Libya is currently exempt from OPEC production quotes and their production coming strong makes OPEC’s plan to fine-tune and adjust as needed more complicated. OPEC+ recently signaled that the increased production quotes that they had previously planned for implementation by January are now on hold given persistent COVID-related demand uncertainty. Libya producing at full bore means other OPEC members would have to accommodate and be more limited in how much they can produce. New Libyan production clearly makes the OPEC + strategy that much more difficult. But rapid recovery in crude prices mid-month suggests that the oil market has digested the Libyan news quite well so far.

Overall, the recent peace talks and latest ceasefire provide a level of optimism for the future of Libya not seen since the fall of Muammar Gaddafi nearly a decade ago. Of course, some caution remains warranted as a long-term power-sharing agreement between both sides is still far off, even with the great start. It is also important to note that now that Libya is producing around 1 million bpd the risk from here is sustaining it, not growing it.