A changed market able to absorb jolt will change again

Bob Tippee

A supply scare happened in May that not so long ago would have pushed up crude oil prices by $5/bbl or more. Prices instead declined.

The scare occurred in Nigeria, where renewed militancy damaged pipelines in the Niger Delta region and forced ExxonMobil and Royal Dutch Shell to declare force majeure on liftings of their crude.

According to the International Energy Agency’s Oil Market Report for June, disruptions to exports through the Qua Iboe and Bonny export terminals lowered Nigerian production for all of May by an average of 100,000 b/d to 1.9 million b/d. In an 86 million b/d oil market, that’s not much.

While the interruptions to supply were in progress, though, there was no way to be sure the jolt wouldn’t be much sharper.

Until the last couple of years, news of trouble in an exporting country known for trouble would have touched off a crude-buying spree. Prices would have jumped—then receded once the disruption was seen to be minor.

In May, however, prices drifted down. The New York futures contract for light sweet crude started May above $86/bbl and ended the month at about $74/bbl, having fallen below $70/bbl in the weeks when Nigeria was especially tense.

So what changed?

Since 2008 the market has filled up with oil and the ability to produce it. Measurable inventories are high by recent standards. Global production capacity, according to IEA, exceeds actual production by 6 million b/d.

Under those conditions, prices don’t react much to burbles in jittery exporters like Nigeria, Venezuela, and Iraq. But those conditions will change.

In a new medium-term projection, IEA says base-case assumptions indicate spare crude capacity among members of the Organization of Petroleum Exporting Countries will begin to decline after next year.

“Although the estimated 2015 level of 3.5 million b/d remains more comfortable than prevailed for much of 2002-08,” IEA says, “the declining trend itself, to well below 5% of global demand, suggests more-nervous markets could reemerge after a prolonged spell of relative price stability in the last year.”

In the oil market, nothing ever lasts.

(Online July 2, 2010; author’s e-mail:

To access this Article, go to: