Could Libya's oil output be affected by its power divisions once again?

• The oil sector in Libya may be paralyzed again due to a political standoff.
• The frequent power struggles and disruptive incidents have cast doubt on the long-term stability of oil prices.
• On Monday, oil prices rose due to Libyan reports, but by Tuesday, they had mostly given up those gains.

The ongoing political standoff in Libya threatens to halt the country's oil sector, which has been a major source of revenue for the north African nation. However, the repeated power struggles and oil disruptions have raised doubts about the long-term stability of oil prices.

Since the NATO-backed removal of Moammar Gadhafi, Libya has been plagued by conflict between the internationally recognized government in Tripoli, led by Abdul Hamid Dbeibah, and the eastern Benghazi-based administration supported by Libya's parliament, the House of Representatives. The shadow of warlord Khalifa Haftar looms over them, as his allied forces control and safeguard most of the country's oilfields.

The shutdown of oilfields in Benghazi was a result of tensions over the fate of oil revenues, which arose when Dbeibeh attempted to remove Central Bank Governor Sadiq al-Kabir.

The National Oil Corporation (NOC) in Libya has not commented on the announced closures, but its subsidiary Waha Oil has stated that protests and pressures could result in the halt of oil production, as per a Google-translated statement.

Sirte Oil, a subsidiary, stated the same reasons for reducing production and called for specialized authorities to intervene to maintain oil production continuity in a Google-translated social media post.

Anonymous Libyan sources, due to security concerns, informed CNBC that various fields have completely stopped or decreased crude production.

In early August, protests led by Fezzan region demonstrators resulted in the shutdown of Libya's largest field, El Sharara, which produces 300,000 barrels per day. The National Oil Corporation declared force majeure on El Sharara's crude exports on Aug. 7, citing circumstances beyond its control.

The production of Libya's largest export crude grade Es Sider has decreased since the shutdown of the Dhahra field, as well as gradual or complete halts at the Amal, Nafoora, El Feel, and Mesla fields, according to Libyan sources speaking to CNBC.

Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC), produced 1.18 million barrels of crude oil per day in July, according to independent assessments in the August edition of the OPEC Monthly Oil Market report. However, between 700,000 to 900,000 barrels per day of this volume could "likely go offline by the end of the week," Rapidan analysts warned at the start of the week, stating that supplies and exports from the majority of Libya's hydrocarbon-rich "Oil Crescent" region "will be offline within days, with outages lasting several weeks."

The latest shutdowns, as described by Andrew Bishop, global head of policy research at Signum Global Advisors, are "the real thing" and could last for "at least a month (and possibly far longer)" due to "zero trust" between the rival parties.

Libya's oil production has been frequently disrupted due to ransom demands for capital or political advantage, which has eroded some market participants' expectations that the latest disturbance will last long term. On Monday, oil prices rallied on reports of the latest disruption in Libya, but surrendered much of these gains in the following day.

On Wednesday, the price of oil decreased once again, with the October contract trading at $78.42 per barrel at 12:57 p.m. London time, which was $1.13 cents per barrel lower than the previous settlement. The front-month October contract was also lower, at $74.31 per barrel, which was $1.22 per barrel below the Tuesday close price.

According to Jorge Leon, senior vice president of oil market research at Rystad Energy, the Libyan reports indicate that prices have not remained high due to a few reasons, including the ongoing disagreement on the Central Bank of Libya, which is expected to be resolved soon.

In the last two and a half years, we haven't seen extended Libyan supply disruptions, and I believe this time will not be different. Both parties have an incentive to resolve the issue as soon as possible, he added.

Goldman Sachs analysts likewise saw the prospective Libyan disruption as short lived.

"According to Barclays' Amarpreet Singh, in a Tuesday note, market participants appear unconcerned about the situation in Libya, which is similar to the geopolitical tensions in the Middle East. Despite the potential risks implied by geopolitical developments, the fundamental direction of the market could move in the opposite direction for an extended period."