Oil prices continue to increase as Libyan oil production falls sharply

Unnamed sources in the country told Bloomberg Wednesday that Libya’s largest oil field, Sharara, has been suddenly shut in. With the pipeline carrying crude from this massive operation having been completely idled.

As a result, sources said Libya’s overall oil production has now fallen to 560,000 barrels per day. Coming just days after Libya’s National Oil Corp. had publicly pegged the country’s production at 700,000 b/d.

That suggests the stoppage at Sharara has lowered production by 140,000 b/d — representing a 20% decline. With the shortfall happening virtually overnight, and with no apparent warning to oil traders.

Here’s the most important point: sources in Libya didn’t give any reason for the outage. Making it difficult to tell if the drop in production will be a prolonged event.

The most likely candidate is political instability. With numerous oil facilities across Libya having seen shutdowns in recent months due to fighting between the country’s national army and various rebel factions.

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In fact, the country’s Es Sider oil export terminal had just reopened for shipments this week — after a three-week stoppage, during which the rebel Benghazi Defense Brigades briefly took control of the facility.

Sources commenting on this latest outage did note that crude exports have now been halted at two other Libya oil terminals: Zawiya and Mellitah. Although it wasn’t clear if the problem is at these facilities themselves, or due to problems with the pipelines feeding the terminals.

Whatever the case, this disruption is an important event for crude prices. With Brent jumping $1.12 per barrel on the news, putting it solidly above $50. Watch for more news from Libya on whether production from Sharara can be restored soon — if not, we could see more upward momentum for oil.