Oil hit by falling Libyan output While Syria may have stolen the headlines in the oil market last week, oil traders and refiners are paying closer attention to Libya. The north African country has seen oil output slashed from around 1.4m barrels a day to around 250,000, as ports and oilfields have been closed by striking workers and militias. In the context of global crude production of around 90m b/d, that may not sound like a huge loss. But in the much smaller market for high quality crude oil in which Libya plays a key part, it is critical. As Libyan exports have dried up, prices of other premium crudes have hit multiyear highs. That is hurting refineries, particularly in Europe, which rely on such oil, and threatens to hasten further restructuring in the troubled industry. It is also shifting trading patterns, discouraging Chinese buyers from importing European and African barrels, which look increasingly expensive. "The high quality crude market is very tight and everything hinges on Libya," says Eugene Lindell, an analyst at JBC Energy in Vienna. If the disruptions continue it could quickly become a serious issue for the market. The so-called "light sweet" variety of crude oil from Libya is low in sulphur content. That means it can be processed profitably by nearly any refinery and has a high yield of desirable products, such as naphtha, used in the petrochemicals industry. JBC estimates Libya accounts for 12 per cent of global light sweet production capacity. Tightness in the market is as unexpected as it is severe. Just a few months ago analysts were forecasting a structural decline in the premiums paid for light sweet crudes. Surging shale oil output in the US was adding to the supply of high quality oil, and the opening of complex refineries that can process heavier crudes was weighing on demand. But that is no longer the case. On top of the Libyan outages crude production in Nigeria, another major source of light sweet barrels, has fallen to a four-year low thanks to large-scale theft. As a result in Europe last week Azeri Light cargoes were trading at a premium of more than $6 a barrel over North Sea oil, the highest in almost two years. That spells trouble for refiners that do not have the sophisticated and expensive equipment to process heavier crudes. Wood Mackenzie, a consultancy, estimates that refineries in the Mediterranean running light sweet crudes were making a profit of $1 per barrel at the start of August, but are now losing $2 for each barrel they process. The last time profit margins were so low - during the Libyan civil war of 2011 - Petroplus, a Swiss refiner, was forced into bankruptcy. And Wood Mackenzie analysts argue the industry could now be in for further consolidation. "We expect those refineries that are not complex to be cutting runs," says Jonathan Leitch, a downstream analyst at Wood Mackenzie. But if the situation continues there is the potential for more closures in the Med. The effects of the Libyan outages are being felt far beyond Europe, however. In Asia they have been compounded by maintenance at gasfields in Qatar and Australia, which has reduced the availability of condensate, a gas-like oil that can substitute for light sweet crudes. At the same time, regional refiners are buying more crude to build stocks of kerosene for heating during the winter. The result has been a series of eye-popping prices for relatively light crudes in Asia. Russia's ESPO crude traded at a record premium of more than $7 a barrel over the regional Dubai benchmark last week, and the premium on Abu Dhabi's Murban crude hit a six-year high in August. Asian refiners are also importing less crude from Europe, where crude tends to be priced off the North Sea's Brent benchmark, itself a light sweet crude that has rallied sharply as a result of the Libyan and Nigerian supply disruptions to a six-month high of $117.34 a barrel last week. Demand is instead growing for Middle Eastern crudes, which are priced against the Dubai benchmark, a medium and sour crude, which has seen its discount to Brent increase to the most in almost two years. Chinese refineries can process most crude types. They are avoiding Brent-linked cargoes at these prices and shipping instead from the Middle East," says Stavroula Betsakou, a senior tanker analyst at ICAP Shipping. Elevated light sweet premiums may also be here to stay, largely because of the lack of alternative sources. While Saudi Arabia, the "swing producer" in the oil market, appears to have increased production to make up for production shortfalls elsewhere, most Saudi output is medium heavy and sour. During the Libyan civil war of 2011, Saudi Arabia manufactured a light and sweet blend from its various crudes to replace the North African country's barrels, but it met with limited success. "Saudi Arabia has a limited ability to counteract shortages in the light sweet market," says David Fyfe, head of markets analysis at Gunvor.