The Atlantic Basin could see a major showdown between the region's key sweet crude producers as around 1 million b/d of Libyan crude is set to return to a brittle physical oil market.
The resumption of Libyan exports is already weighing on other sweet grades from the US, Algeria, Azerbaijan, Nigeria and Kazakhstan, trading and industry sources said.
More and more sweet crudes will be pushed east, as oil demand in Europe is likely to slow down amid a second-wave of coronavirus infections, they added.
"Demand has been okay but you got to imagine it is teetering on the precipice because of the flood of Libyan crude coming in," said a Europe-based crude oil trader.
"These barrels are coming in to a market with fragile margins. And with restrictions tightened in Europe, there is more supply and limited demand," he added. "I don't see how lighter grades can hold [their levels]."
Fragile outlook
Traders said European refiners increased their oil appetite for November, with a steady rise in purchases, boosted by an increase in refining runs.
But with concerns of increased restrictions in Europe in the coming weeks, demand could start to plateau or fall for December, just as Libyan crude tops the 1 million b/d mark.
Crudes such as US' WTI, Kazakhstan's CPC Blend, Algeria's Saharan Blend, Nigeria's Bonny Light and Azerbaijan's Azeri Light will be the main grades in the firing line, according to sources.
The Saharan Blend grade has seen its values weaken sharply after the lifting of an eight-month Libyan oil blockade.
The ultra-light Algerian crude was assessed at a five-month low of Dated Brent minus $0.65/b on Oct. 4, Platts data showed.
Saharan Blend prices have remained under pressure since then, and it was assessed at Dated Brent minus $0.50/b on Oct. 27,
Vulnerable crudes
Demand for Libya light sweet crude has so far been very robust.
European refiners have been scrambling for Libyan grades such as Sharara, Es Sider and Sarir/Mesla, as they remain cheaper than some other light sweet barrels
But with the demand outlook looking fragile, the sentiment could turn very bearish by December, sources said.
Another Europe-based trader expected crude differentials for Azeri Light to come under a lot of pressure in the coming weeks.
"The market is quite heavy because of prompt Libyan crude so the third decade Azeri program is looking long," the trader said.
"I don't see demand. I think it should be lower. There has been a lot of Sharara and Mellitah injections. A lot of Es Sider coming online. Libya's Es sider competes with Azeri Light. I really feel like Azeri will come off hard," she added.
S&P Platts Analytics believes Libyan crude will largely clear in the Mediterranean and that the prices will be competitive against long-haul grades.
"Pre-pandemic US Gulf Coast exports to the key Libyan Med outlets reached nearly 500,000 b/d, and we believe US and Nigerian crudes are vulnerable to the return of Libyan exports," it said in a recent research note.
The rise in Libyan crude to Europe has coincided with a fall in US exports to Europe.
And, with demand for Libyan crude proving resilient for now, US and West African crudes are likely to come under further pressure.
But Asian demand is starting to rebound sharply especially in China and India.
Sources said this will boost more flows of Atlantic Basin crude eastwards.
"The Libyan increases near-term crude length in the Atlantic Basin and will ultimately result in relatively higher exports to Asia for US and WAF grades," Platts Analytics added.
Output surge
Libya's crude and condensate output has more than quintupled over the past month, averaging close to 600,000 b/d this week, according to Platts estimates.
On Oct. 23 Libya's state-owned National Oil Corp. said Libyan oil output would reach 800,000 b/d in two weeks and it will exceed 1 million b/d within four weeks.
This was after NOC lifted force majeure on crude loadings out Es Sider and Ras Lanuf, opening up all of the country's oil terminals.
Last week, the UN-backed Government of National Accord and the self-styled Libyan National Army signed a permanent cease-fire mediated by the UN after almost a two-year civil conflict.
Libya will export more than 700,000 b/d next month, according to shipping data seen by Platts.
The OPEC member exported 180,000 b/d in September, its highest monthly volume since January, data from intelligence firm Kpler showed. Exports have so far averaged 369,000 b/d in October, according to Kpler.
The country is now beginning to ramp up output at key oil fields such as Sharara, Waha, and El Feel among others.
On Jan. 18, eastern tribes, supported by the LNA, halted exports from five key oil terminals, which reduced the country's crude production to the lowest since the 2011 civil war.
Libya's oil production had fallen to as low as 70,000 b/d in recent months from around 1.1 million b/d before the blockade in January.
