The oil market has lost 300,000 b/d of supply in 2 months from a single exporter, and the price of crude is falling. Until demand began faltering as the world entered recession at the end of 2007, the mere threat of such a loss would have boosted prices at least temporarily. That it didn’t happen this time shows how thoroughly conditions have changed.
The supply loss came in Nigeria, where rebellion is crippling production and transportation. In its July Oil Market Report, the International Energy Agency estimated June oil production in Nigeria at 1.72 million b/d from capacity of 2.55 million b/d. The 300,000 b/d loss due to a surge in violence adds to shut-ins totaling 500,000-600,000 since insurrection began at the end of 2005, according to IEA. Nigerian National Petroleum Corp. on June 25 said 1.4 million b/d of production was offline.
Retaliation
The disruption is largely the work of a group called Movement for the Emancipation of the Niger Delta (MEND). IEA says MEND has been retaliating against a two-part effort by the government to suppress the militancy. In May the Nigerian military launched attacks against warlords around Port Harcourt and offered cash payments to militants abandoning the rebellion. The government also offered to release an imprisoned MEND leader. MEND rejected the overture.
Production casualties from the consequent escalation in violence include these listed by IEA:
- A halving of production from levels of earlier this year by the Shell joint venture to 140,000 b/d. Last year the group produced an average 850,000 b/d from capacity estimated at 1 million b/d. In March, Shell declared force majeure on shipments of Bonny Light and Forcados crude.
- Loss by Eni of 24,000 b/d of Brass River crude flow due to pipeline sabotage on July 8. Eni earlier shut in 33,000 b/d of production because of damage to a pipeline linking production with the Brass River export terminal. Eni declared force majeure on Brass River exports on June 23.
- Shut-in by Chevron of 100,000 b/d of Escravos crude production, about one third of the company’s Nigerian output, because of sabotage to pipelines.
Obviously, the threat to Nigerian production, spread vulnerably among 600 fields and carried by 6,000 km of pipeline, is serious. Yet a market that 2 years ago would have been in panic has shrugged off the loss as though it doesn’t need the oil.
Alternative supplies indeed are at hand. Oil inventories held by economically developed members of the Organization for Economic Cooperation and Development are strongly above average both in volume and relative to expected consumption rates.
Replacement supply is available, too, from production that’s promptly available but not on stream. In its latest report, IEA put spare production capacity among members of the Organization of Petroleum Exporting Countries, excluding Iraq, at 6.34 million b/d. June numbers in this category from recent years have been much lower: 2.63 million b/d in 2008, 3.47 million b/d in 2007, 2.61 million b/d in 2006, and 1.58 million b/d in 2005.
Spare production capacity tends to decline under the conditions that make inventories fall, when demand is rising and capacity isn’t expanding in step. When available spare capacity falls below 2.5-3 million b/d, the market becomes very reactive to hints of problems in places like Nigeria and Venezuela. Those countries have demonstrated their vulnerability to the political disruption of oil production. Like Nigeria, Venezuela can produce about 2.5 million b/d. Spare capacity below those potential losses was the norm from 2002 until last year.
Now, demand-snuffing recession, capacity additions, and OPEC production cuts have filled inventories and swelled capacity surpluses. With all that oil in storage and all that potential output at ready, the broad market seems unperturbed by Nigerian production cuts. The crude price acts as though hitched to stock market indices.
A problem lurks, however. Nigeria produces the light, sweet crude that refiners increasingly favor and that tends not to back up in reserve. The country’s troubles, especially if they worsen, will have market effects not yet evident to everyone.
