By Arathy Somasekhar
(Reuters) - Oil prices plummeted over 4% on Tuesday to hit their lowest levels in almost nine months due to reports of a potential resolution to the Libyan production and export dispute.
Prior to the news of potential increased oil supply, prices had already been declining due to concerns about weakened demand caused by slow economic growth in China, the largest importer of crude oil in the world.
Brent crude futures were down $3.51, or 4.5%, at $74.02 a barrel at 11:31 a.m. ET (15:31 GMT), marking the lowest level since December. West Texas Intermediate crude futures, which did not settle on Monday because of the U.S. Labor Day holiday, were down $2.97, or 4.1%, at $70.58 - their lowest price since January.
The United Nations Support Mission in Libya (UNSMIL) announced on Monday that there was a "significant" understanding between rival Libyan factions following talks in Tripoli to help resolve the crisis. UNSMIL stated that the two sides had agreed to review a draft agreement with the aim of finalizing and signing it on Tuesday.
Libya's central bank governor Sadiq al-Kabir indicated that a deal to resolve the dispute and resume oil output was on the brink of being reached, as reported by Bloomberg on Tuesday.
The speculation surrounding a potential deal has triggered momentum selling, according to Ole Hansen, an analyst at Saxo Bank.
Libyan oil exports at major ports were halted on Monday and production was reduced across the country, as reported by six engineers to Reuters, in the midst of a standoff between rival political factions over control of the central bank and oil revenue.
Libya's National Oil Corp (NOC) declared force majeure on its El Feel oilfield starting from Sept. 2.
Total production had dropped to just over 591,000 barrels per day (bpd) as of Aug. 28 from nearly 959,000 bpd on Aug. 26, NOC disclosed. Production stood at around 1.28 million bpd on July 20, according to the company.
The news from Libya compounded an earlier decline in prices linked to weak Chinese economic data.
"The weaker-than-expected Chinese manufacturing PMI over the weekend likely exacerbated concerns about the Chinese economy's performance," said Charalampos Pissouros, senior investment analyst at brokerage XM.
China reported on Monday that new export orders saw a decline for the first time in eight months in July, and that prices of new homes rose in August at their slowest pace this year.
Hopes of a boost in prices due to the U.S. driving season this summer have not materialized, said Fawad Razaqzada, market analyst at Forex.
"The fact that recent data shows no signs of any acceleration in import demand in China, Europe or North America points to a situation where the oil market is not going to be as tight as expected a few months ago," Razaqzada remarked.
Some supply is expected to return to the market as eight members of OPEC and affiliates, collectively known as OPEC+, are set to increase output by 180,000 bpd in October. Industry sources indicated that the plan is likely to proceed regardless of concerns about demand.
Disruptions to supply flows from the Middle East following an attack on two oil tankers in the Red Sea off Yemen on Monday were insufficient to support prices, as the tankers did not sustain major damage.
Analysis:
The recent drop in oil prices can have significant implications for investors and individuals alike. The resolution of the Libyan production and export dispute could lead to increased oil supply, which in turn may continue to drive prices down. This could benefit consumers through lower fuel prices, but it may impact oil-dependent economies and companies negatively. Additionally, the weak Chinese economic data and lackluster demand from major regions could further contribute to the downward pressure on oil prices. Investors should closely monitor the developments in the oil market and consider diversifying their portfolios to mitigate potential risks associated with volatile commodity prices.
