Iran, Nigeria influence markets

Feb. 6, 2006
Fear of potential disruptions of crude supplies from Nigeria and Iran is a major factor in the recent fluctuation of world oil prices.

Fear of potential disruptions of crude supplies from Nigeria and Iran is a major factor in the recent fluctuation of world oil prices.

“In a world that currently has perhaps just 1.5 million b/d of spare upstream capacity, credible threats [against] 4 million b/d in Iran and 2.5 million b/d in Nigeria will almost inevitably have a significant impact on prices,” said Paul Horsnell of Barclays Capital Inc., London. “Such is the momentum and rigidity in views surrounding the Iranian issue, and such is the intensity of the attacks in Nigeria that...we believe the threats to supply are credible in both cases.”

Militants attacked Agip SPA’s office in Port Harcourt, Nigeria, and stole $28,000 on Jan. 24. They escaped in speedboats after a shootout with security forces that killed 8 officers and one company employee. Agip workers were evacuated. Royal Dutch Shell PLC earlier shut in production of 221,000 b/d of crude because of attacks on its facilities in Nigeria (OGJ Online, Jan. 25, 2006).

US and European officials tried unsuccessfully to get the International Atomic Energy Agency to impose sanctions against Iran after it broke seals on some of its nuclear-research sites. Iran has denied that it is planning to develop nuclear weapons, however (OGJ Online, Jan. 18, 2006).

“Iran is rapidly becoming the most important noneconomic influence on the oil market today. The ongoing nuclear tensions are unnerving the market and carry with them the real possibility of a military confrontation at some point in the foreseeable future,” said analysts at the Houston office of Raymond James & Associates Inc. “While an Iranian-related oil supply interruption is not likely in the next 3-6 months, the odds have increased greatly that we will see one in the next 2 years.”

They warned, “We have to remain mindful of other wildcard countries, as well: Saudi Arabia, Russia, Nigeria, Venezuela, and Iraq. While the risk of each of these individual oil supply disruptions is low, in the aggregate the oil market is facing what may be an unprecedented combination of potential risk factors.”


“While the Iranian issue holds the greatest dangers going forward, it has been the more immediate problems in Nigeria that have been the key market driver over the past week,” Horsnell reported Jan. 19.

“Low-level violence with more severe incidents on occasions has long been a feature of the usual flow of events in the Niger delta. However, we believe events over the past week represent a significant break with the previous pattern. The actions of the group that attacked the EA field [off Warri], took hostages, attacked pipelines and the Benisede pumping station does not seem to fit the usual modus operandi of previous groups,” Horsnell said.

The Nigerian militants appear to be better organized, more ambitious, perhaps more broadly based in local political terms, and more heavily armed, he said. Horsnell sees “a very significant escalation” from the occupation of onshore pumping stations by villagers to deadly attacks on offshore facilities “using speedboats, causing significant loss of life, and pursuing a broader and more intractable set of demands.”

Because of such threats, Barclays Capital increased its forecast for the average 2006 price for benchmark US sweet, light crude by $7 to $68/bbl. “The upside to prices does not depend on an actual interruption of supplies,” Horsnell said. “All it needs is enough of a question mark about Iranian reactions to make it difficult for traders to go aggressively short. In reality we expect that there will be more than a question mark, given that the potential implications for oil already appear to be a key component of Iranian tactics to unsettle some of the key permanent UN Security Council members. We believe that Iran is going to be a major issue in the coming months, and that so far the potential severity of the situation has not been priced in to any significant extent.”

He said, “While we would expect that the pace of events surrounding Iran will wax and wane in coming weeks, adding further volatility to the market, we believe that the current flow of events is now heading towards the significant possibility of a starker stand-off and confrontation.

“Oil is already involved, and we would expect it to remain heavily involved in the passage of events surrounding Iran. In particular, there is still some significant upside risk to our new forecasts should the diplomacy around Iran move in as stark a direction as we think it is likely to.”

(Online Jan. 30, 2006; author’s e-mail: [email protected].)