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Libya may deepen Brent's premium over US oil

ExxonMobil oil rig
Source: ExxonMobil
ExxonMobil oil rig

U.S. crude futures are on course for their fifth weekly loss, reflecting a build-up of domestic stockpiles while Brent crude may gain on concern of continued export disruptions from OPEC member Libya, CNBC's latest market survey of traders, analysts and strategists showed.

Broadly, two-thirds of the respondents in CNBC's latest poll of oil market sentiment (12 out of 18) believe prices will continue falling this week. Twenty eight percent (5 out of 18) expect prices to trade at current levels while a single respondent expects prices to gain.

However, fundamental dynamics driving the two markets may widen the gap between the global benchmarks - which currently stands at almost $12 a barrel – to over $15 until U.S. refineries complete seasonal maintenance, helping to drain the supply overhang.

High stockpiles of U.S. crude have pressured U.S. oil prices, which fell 3.3 percent last week, the steepest drop since the week ended June 21. Brent crude settled nearly $3 lower on Friday at its lowest since July 4.

Carl Larry, president of Houston-based consultancy Oil Outlooks and Opinions said while softer U.S. economic growth will impact demand in the world's biggest oil consumer, stronger factory activity in China combined with supply fears in Libya, Iraq and Nigeria could drive Brent's premium over U.S. crude to $16 a barrel.

The possibility of a rate cut by the European Central Bank this week, and a potential announcement by the ECB of further stimulus, are "also creeping into the strength of Brent," Larry said. "November was a month of turnaround in the opposite direction last year. We saw WTI rally and Brent fade under economic strife in the EU, but we think the tables are turned and we are going to be playing the opposite side of the field this month."

Unrest in Libya and the challenge of returning production and exports to normal levels will continue to support Brent crude and widen the spread, strategists said.

"While WTI continues to be weighed down by higher refinery maintenance in the U.S. and the associated build in crude stocks seen there in the last two weeks, the Libyan supply situation is rather more bullish on the other side of the Atlantic," said Johannes Benigni, Managing Director of JBC Energy in Vienna.

Protests

Leaders of an autonomy movement in Libya's oil-rich east unilaterally declared a regional government on Sunday, in a further challenge to the weak central government, Reuters reported. The recent spate of protests and strikes at ports and oil fields have knocked down crude production to some 10 percent of Libya's capacity of 1.25 million barrels a day.

"With crude exports down to approximately 10 percent of capacity, the fractured nature of the protest groups is keeping a resolution elusive for the government as it struggles to appease all the various grievances." JBC Energy 's Benigni said.

Goldman Sachs last week cut its 2013 estimate for production from the Organization of Petroleum Exporting Countries, citing supply constraints in Libya.

"Disruptive protests at western fields and terminals in Libya further cut exports this week," said Thina Margrethe Saltvedt, senior macro oil analyst at Nordea Markets in Oslo last Friday. "We expect the majority of eastern production to remain blocked for the rest of 2013 and most of 2014."

Supply risks from West Africa are also back on the agenda and could drive Brent higher. Platts reported late last month that fresh tension is now brewing in southern Nigeria following a spate of threats by the MEND (Movement for the Emancipation of the Niger Delta) militant group.

The group has threatened to attack Shell's giant offshore Bonga field, warning "offshore operations are not a safe haven. MEND has visited Bonga before and we will do it again when the time is right."

While it is unclear if MEND retains the ability to cause damage on the scale it did before the amnesty in 2009, "increasing activity would likely push disruptions above the current level of 420,000 barrels a day from the first three quarters this year," Nordea Market's Saltvedt said.