Good news for oil (and Libya)

The FT is reporting that:

Colonel Muammer Gaddafi’s 41-year rule over Libya was collapsing as rebel forces advanced deep into the capital, capturing his son, Seif al-Islam.

As jubilant crowds filled Green Square at the heart of Tripoli on Sunday night, the rebels said they would grant safe passage to Col Gaddafi and his family if they agreed to leave the country, claiming he had called for talks with the leader of the National Transitional Council amid reports that his presidential guard surrendered to rebel forces

But amid celebrations in Tripoli and the rebel capital of Benghazi, Col Gaddafi maintained a defiant posture until the end. In an audio message on state TV, he called on all Muslims and Libyan tribes to march on the city to prevent themselves becoming servants to imperialists and traitors.

Mustafa Abdel Jalil, head of the Benghazi-based rebel council, told Al Jazeera television that the leader’s son had been captured, saying he had ordered that he be treated well “so that he can face trial”.

At least one other son has also either handed himself in or been arrested while rebel forces said they were surrounding members of the ruler’s inner circle who have been instrumental in maintaining the defence of his regime.

The rapid advance of rebel forces into the centre of Tripoli came after a series of advances in strategic towns around the capital over recent days that broke months of stalemate on the front lines.

As I have written before, the oil price spike coincided with the shift of the MENA crisis to Libya:

The above chart marks the key moments in the MENA (Middle East and North African) crisis. As you can see, each key event was accompanied by varying degrees of increased risk premium in the oil price. If we take a starting point of $88 in mid December when Tunisia sparked the revolution and a finishing point in early April, when the Libyan war was in its early stages and supply anxiety reached a peak at a price of $113, we get some notion of the risk premium currently built into the price: $25.

Of course, this is guesswork to the extent that the MENA crisis cannot be isolated from other factors acting upon the price. But it does give us at least a guide to how significant the risk premium is, if we accept that expected global growth rates were roughly consistent through the period.

Previously, I have also argued that in a market dogged by perceptions of supply constraints, spare capacity determines price as much as does immediate supply, as the following chart bears out:

The latest IEA figures for OPEC spare capacity (June) showed another fall to 4.46MB. But, it must be noted, that includes over 1.8MB of Libyan crude that is offline for current supply and spare capacity. In short, the MENA crisis continues to exert a major influence over Western economic prospects.

We are a long way from resolution in Libya. When regime’s like this fall, the power vacuum left behind is often filled by the jockeying of previously suppressed parties – think Iraq and the many Shia groups that raced to gain power. It is quite likely that conflict will continue and the civil war evolve into new alliances in the medium term. Again, as the FT reports:

Top of the list of uncertainties is the fate of Col Gaddafi himself, as well as members of his inner circle, although rebels were claiming they had captured his second son and one-time heir apparent Seif al-Islam. They also said his eldest son Mohammed had surrendered.

The ease with which rebels moved into Tripoli suggested many of his security forces and supporters had decided to surrender or disappear. But pockets of armed fighters may remain in a city where the colonel had a long-standing policy of arming civilian militias as a tool of repression.

Other hitherto pro-regime outposts in this thinly populated but sprawling desert land include Col Gaddafi’s home town of Sirte and the southern town of Sabha on the way to Libya’s sub- Saharan neighbouring states.

A second question is how the rebels will organise themselves amid concerns over possible factionalism, highlighted by the mysterious killing last month of their eastern military commander General Abdel Fattah Younis, who helped Col Gaddafi mount his 1969 revolution but defected to the opposition at the start of the uprising six months ago.

While the heart of the rebellion and its ruling national transitional council are in the country’s east, in the historic region of Cyrenaica, the crucial thrust on the capital this month has been made by opposition fighters from the west.

Some Gaddafi opponents in the west have expressed doubts and suspicions about the eastern rebels, who are themselves a diverse group ranging from liberals with secular ideas about democracy to Islamists also persecuted by Col Gaddafi.

But, I think it likely that markets will interpret the collapse of the Gaddafl regime as good news, at least until proven otherwise. With oil already having toppled to $85 or so on growth concerns, we can look forward to further geopolitical falls now too.

If stabilisation comes quickly, it will take a lot of pressure off all major economies monetary policies and we can look forward to stimulus sooner.

Some good news, at least for now.