Oil markets have struggled to gain consistent momentum over the past few weeks, as ongoing concerns about a potential hard landing for the U.S. economy overshadow supply disruptions. On Monday, crude oil futures jumped over 3% after Libya’s rival eastern government announced a halt to oil production and exports, adding to gains from the previous week when Federal Reserve Chair Jerome Powell hinted at possible interest rate cuts starting in September.
However, these gains have not lasted. By Wednesday, Brent crude for October delivery had fallen to $79.23 per barrel, down from a weekly peak of $81.47 on Monday. Similarly, West Texas Intermediate (WTI) was quoted at $75.15 per barrel, after reaching $77.54 on Monday. Moreover, Brent spreads have widened significantly, with October-November backwardation increasing by $0.51 per barrel week-on-week to $1.07 per barrel as of August 26. The November-December spread rose by $0.43 per barrel to $0.85 per barrel, while the December 2024-December 2025 spread increased by $1.08 per barrel to $4.13 per barrel.
Libya’s Oil Crisis
The surge in oil prices on Monday was driven by Libya’s eastern government’s declaration of force majeure on all oil production and exports, which could remove up to 1 million barrels per day (bpd) of crude from the market. This development came as oil was already trading higher after Israel launched airstrikes on Hezbollah targets. However, the situation in Libya is seen as having a more substantial impact on oil markets because it represents a significant loss of “real barrels,” tightening the physical market as long as the crisis persists, according to UBS analyst Giovanni Staunovo.
In 2022, a deal between the Tripoli-based Prime Minister and the Benghazi-based warlord Khalifa Haftar reunified Libya’s central bank under Tripoli’s control, while a Haftar loyalist took charge of the state oil company. Since then, eastern and western factions have been vying for control over state revenues. Recently, eastern factions halted oil flows in response to the Tripoli-based Presidency Council’s attempt to remove Central Bank Governor Sadiq al-Kabir.
Instability in Libya’s oil output has been a recurring issue since the 2011 First Libyan Civil War. According to Standard Chartered, this instability has resulted in the loss of over 4 billion barrels of oil output and cost the country $320 billion in revenue. Despite recent sharp swings in oil prices, there has been no sustained momentum, raising doubts about the quality of price discovery in these cycles. Standard Chartered analysts suggest that recent price fluctuations have been largely driven by spillovers from interest rate markets and seasonal algorithmic trading rather than significant changes in market fundamentals. Experts also point out that negative sentiment towards oil, in contrast to neutral sentiment towards copper, reflects heightened fears of a U.S. economic downturn and a bearish outlook for 2025. This pessimism is difficult to justify, given that U.S. crude oil inventories have fallen by 34.7 million barrels over the past eight weeks, averaging a decline of 620,000 barrels per day.
Mixed Outlook for Natural Gas Prices
The natural gas market has shown mixed performance, with European markets remaining bullish while U.S. markets have continued to lag. European natural gas futures have remained steady near €40 per megawatt-hour, driven by supply concerns related to Norway’s annual maintenance and the ongoing Ukraine-Russia conflict. Maintenance work has reduced Norwegian gas supply by 10 million cubic meters per day, impacting major pipelines such as Franpipe, Emden, and Dornum. Despite this, Russian gas continues to flow to Europe, and regional storage levels are around 92% of capacity, surpassing the EU’s November target by over two months.
In contrast, U.S. natural gas prices have weakened, with front-month Henry Hub (September) falling below $2 per million British thermal units (MMBtu) for the first time in three years, trading at $1.93 per MMBtu in Wednesday’s session. However, the Henry Hub forward curve is in a steep contango, with December 2024 to February 2025 contracts all settling above $3.00 per MMBtu, reflecting relatively high inventory levels. U.S. gas prices were further pressured last week by weather forecasts indicating a decline in cooling demand in key consuming regions over the next two weeks, along with the absence of significant hurricane activity near the offshore Texas gas fields.