Libya’s oil blockade is now entering its seventh month and the war-torn country’s oil output is hovering at just 100,000 barrels per day (bpd) instead of the pre-crisis 1.2 million bpd. Without a peaceful solution on the horizon, Rystad Energy is further pushing back its expected restart to the fourth quarter of 2020, a change that will help reduce the expected global production surplus to just 58.6 million barrels, or to about one-third of our previous forecast.

In the most optimistic of scenarios, Libya’s 2020 exit production rate will be between 700,000 and 800,000 bpd. But this estimate itself carries downside risk: once oil production comes back on line, it would take Libya another three to four months to ramp up production to hit the 1 million bpd mark.

The damage is not just limited to the short term. The prolonged blockade has negatively impacted both infrastructure and oil wells, so the eventual ramping-up of production will demand capex spending on rehabilitating wells and pipelines. For this purpose, Libya’s National Oil Company (NOC) estimates that between $500 million and $1 billion is needed just to reach the pre-blockade levels of 1.2 million bpd.

It is not only oil output that has languished. Libya’s production capacity itself has lost between 100,000 bpd and 150,000 bpd due to the ongoing blockade, according to our estimates. If this deadlock is not resolved in the next few months, we might see it dropping by an additional 200,000 to 300,000 bpd. This puts the country’s desired oil production level of 1.5 million bpd even further out of reach.

“Our latest global liquids balances report still suggests there will be a shift towards a surplus from August and for the ensuing three months, but it is less precarious than previously estimated and developments in Libya have a lot to do with this revision,“ says Bjornar Tonhaugen, Rystad Energy’s Head of Oil Markets.

In July, before the change in our Libyan production forecast, we calculated the accumulated global surplus to about 170 million barrels between August and November. August’s implied surplus is now seen at just 0.1 million bpd and September’s at 0.3 million bpd. October, the month with the largest contribution to the glut, will see an imbalance of 1.4 million bpd. The surplus will then be limited to 0.1 million bpd in November, before demand takes the lead from December.

We are now also reducing our supply expectations for OPEC heavy hitters such as Saudi Arabia, the UAE, and Kuwait as we expect slower ramp-up phases given the wobbly demand recovery outlook ahead. Significant upward revisions were applied to Canada, as oil sands projects are exhibiting a rather resilient recovery in production.

Back in Libya, production at the Messla oil field resumed in July 2020. NOC unsuccessfully attempted to lift the force majeure on exports of oil and partially restarted oil production from Messla, which ramped up to 30,000 bpd (still only half capacity) and remains the only onshore producing asset. Waha Oil also reportedly restarted partial oil production from its Gialo oil field around the same time but was forced to shut down again.

If Messla remains on line in August we estimate its oil production will reach 30,000 bpd, although 10,000 bpd will go to a local refinery and the rest will go to storage. On a country level, we estimate production to be between 100,000 and 110,000 bpd. But if the deadlock continues, we believe Messla would go offline due to storage constraints and as a result, Libya’s oil production would regress to between 80,000 and 90,000 bpd, similar to the lows seen during April to June 2020.

“The force majeure has effectively taken off 800,000 to 900,000 bpd of light sweet crude from the market and is providing some relief to Brent prices which are already under stress due to the market imbalance. When Libya’s oil production comes on line, it will increase competition for the light sweet grades trading in Asian and European markets,“ Tonhaugen concludes.