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Kilduff: Gaddafi's Fall Will Deliver Blow To Oil Market

The apparent end of Mohamar Gaddafi’s regime in Libya has not brought an expected fall in oil prices, yet. The six-month uprising has halted Libya’s 1.6 million barrels of production, and approximate 1.1 million barrels of exports to the world market, the majority of which, 85 percent, went to supply Europe.

The loss of Libya’s oil was a critical blow to the market.

Libya may only be the world’s 17th largest producer, but its oil is of a quality and grade that makes it invaluable. It is naturally low in sulfur and it is “light,” meaning that is more like water than molasses. Its low sulfur property makes it ideal for producing motor fuels, especially gasoline. European refiners, in particular, are heavily reliant on this supply to meet their strict pollution mandates.

The Libyan outage and production issues in Nigeria and the North Sea caused oil prices to soar.Supplies tightened to such a degree that a global, coordinated release of oil from strategic petroleum reserves was undertaken.

The release was meant to fill the production gap with 2 million barrels per day for 30 days, which is the sum total of the outages listed. Another release is still being considered.

Oil prices have fluctuated wildly, of late, along with the equity markets, but they are down considerably from earlier in the year.

The fall of Gaddafi will enable further declines in the weeks ahead.

There has been considerable debate over how quickly the Libyan oil will return to the market. Some estimates speculate the return of these barrels could take 2 years or longer.

Don’t believe it.

On Thursday, Libyan rebel leader, Ali Tarhouni, said he expects some 500,000-600,000 barrels of oil per day to return to production in 2-3 months. He suggested that full production could resume within a year. And that makes sense because he also stated that only 10 percent of Libya’s oil operations appear to be damaged.

Both sides of the conflict were careful not destroy or launch widespread attacks on the oil infrastructure. This was not Iraq, where Saddam Hussein made scorched earth and oil wells part of his defense plan. The Libyan factions recognized the unifying characteristic of petro-dollars. The main production facilities changed hands several times, during the battle, but it was more like a game of capture the flag than the Battle of the Bulge.

"So, for once, it seems, we have a conflagration in an oil-producing country coming to a good end for the people of that country and consumers. Libyan oil production in the years ahead could soar." -Partner, Again Capital LLC , John Kilduff

During the conflict, both sides attempted to export oil to generate currency, and the rebels were successful in getting two partially filled tankers out to the market.

Beyond the seemingly good repair of the oil infrastructure, the other good news for oil consumers is that the rebels appear ready to honor all pre-war oil contracts. Western oil companies have a long history in Libya. Conoco, Occidental Petroleum, Hess are among the U.S. companies in Libya, and BASF and Italy’s Eniare the leading European companies in the country. Eni is preparing to send personnel back into Libya already, and the Libyan National Oil Company has recalled workers to Ras Lanuf and Brega.

This is a rare event for the oil markets, where we experience regime change with little damage to the oil pipelines and refineries, and no abrogation of standing contracts. The difficult challenge will be whether or not the rebels' council can hold the country together. A leading figure was killed by a rival faction, recently, and the tribal culture of Libya runs deep. However, the population is small, and Gaddafi did undertake to breakdown the tribal nature of Libya.

If we see the first barrels return to the market quickly, Brent crude oil prices should quickly retreat into the low $90 per barrel mark, and eventually slide down toward $80 per barrel, and the US WTI price should trade down to the low $70s.

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John P. Kilduff is Partner at Again Capital LLC Ltd. He's also a CNBC contributor.