Oil Prices in Freefall Amid Global Economic Woes

Global crude oil prices in early Wednesday were trading below the $75-per-barrel mark amid indications that warring factions in Libya have resolved their differences, while traders are betting that the Organization of the Petroleum Exporting Countries (OPEC) will relax its restraints on production.

Crude oil started a trading week shortened by the long Labor Day weekend in the U.S. in the black, on word that Libya declared force majeure on some of its production.

Dryad Global, a maritime risk consultant, issued an advisory Monday that the government in control of eastern Libya put a stop to oil production and exports, amid disputes over the leadership at the nation's central bank.

"The five eastern oil ports of Lanuf, Marsa el Brega, Ajdabiya, Al Ugaylah and Tobruk, which handle almost two-thirds of exports, are closed," Dryad's report read. "Sharara, El Feel, Amal, Nafoora, Abu Attifel and Srir oil fields have closed or reduced production."

Dryad said that left Libyan crude oil production at about 450,000 barrels per day (BBL/d), roughly half of its peak performance. Secondary sources reporting to economists at OPEC put Libyan production at 1.17 million BBL/d for July, the last full month for which data are available.

Crude oil prices, however, quickly lost ground after it emerged that the two Libyan governments had agreed to seat a new head at the central bank, possibly ending the stalemate. On Wednesday, Brent crude oil prices slipped deeper into the red, shedding about 1% in early trading to move just below $73 per barrel.

Brent was trading closer to the $80 mark during the last full week of August. Tamas Varga, an analyst for London oil broker PVM, said the reaction was largely a reflection of the market's overall mood.

"It shows that the underlying sentiment was very bearish, and the plausible agreement was the spark that triggered the latest wave of selling," he told Industrial Info.

Headwinds are blowing in the global economy amid a lackluster performance in China, the second-largest economy after the U.S. Meanwhile, survey data from the Institute for Supply Management (ISM) showed that U.S. manufacturing activity declined for five-straight months to August, signaling recessionary strains are building in the world's largest economy.

"Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty," said Timothy Fiore, the chair of ISM's manufacturing business survey committee.

U.S. inflation is moving closer to the 2% goal set by the Federal Reserve, leaving room for a cut in lending rates by next month. Should the Fed be too aggressive, however, it could push the economy into a formal recession.

Meanwhile, OPEC and its non-member state allies, a group known as OPEC+, may be considering an end to a years-long effort to keep markets in check through voluntary production cuts. Unwinding a pledge to keep barrels off the market would only add to the bearish sentiment.

Brent crude oil is trading at its lowest level since December. The price at this point last year was closer to $90 per barrel.

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