Oil prices fall as Libya nears truce

Oil prices fell by more than 4 per cent on Tuesday, condemning the FTSE 100 to its biggest daily drop in two weeks, as optimism grows that crude oil from Libya will soon start flowing again.

The prospect of more supply coming to market, coupled with demand worries in the face of sluggish economic growth in China, the world’s largest oil importer, sent prices down to their cheapest this year.

The cost of a barrel of Brent crude fell as much as 4 per cent to $74.44 on Tuesday afternoon — the lowest level since December. The price of West Texas Intermediate crude slipped 3.5 per cent to an eight-month low of $71.00.

The FTSE 100, which counts Shell and BP as two of its largest constituents, was caught out by the drop in crude prices, sliding 66.09 points, or 0.8 per cent, down to 8,297.75 on Tuesday.

It was the Footsie’s worst day since August 20, although London’s blue-chip index fell back only to where it was at the end of August. Shell shares retreated 72½p, or 2.7 per cent, to £26.12 and are now back to where they were in March, while BP fell to a two-year low of 416¼p after falling 13¾p, or 32 per cent.

Earlier this summer, Libya was producing about a million barrels of oil a day, but that output suddenly halved last week amid political infighting. The nation’s internationally-recognised western government in Tripoli has been trying to oust Sadiq al-Kabir, the head of the Libyan central bank who has the support of the eastern-based parliament.

The stand-off came to a head last week when a committee from the Tripoli government took over the premises of the central bank, forcing al-Kabir and some of his colleagues to flee Libya “to protect our lives”.

The eastern government responded to the takeover of the central bank by announcing the shutdown of oil production, sending the country’s daily production down to about 450,000 barrels.

However, al-Kabir told Bloomberg on Tuesday that there are “strong” indications that the two political factions are nearing an agreement to overcome the current hostilities. “If they sign today, I’ll be back tomorrow,” Al-Kabir, who is in Turkey at the moment, said.

A truce in Libya would add more than 500,000 barrels a day to global supply, at a time when other oil-producing countries are also trying to ramp up their own production. The countries in the Opec+ cartel are scheduled to boost their output by about 180,000 barrels of oil a day from October.

The prospect of a supply glut comes amid uncertainty about demand, which was prompted by weak Chinese economic data over the weekend. New export orders fell for the first time in eight months, while prices of new homes rose at their slowest pace this year in August.