Nigeria's Peace Holds Key to Near-Term Oil Prices

A tentative ceasefire in Africa's most populous nation and growing Canadian output promises to tip the scales in favor of supply.
By Paul Whitfield ,

Few could begrudge either Canadian or Nigerian oil producers a return to normalcy after the recent woes they have suffered - but their return to the global oil market promises pain for oil producers and the potentially the wider market.

That became clear Friday when oil prices dipped on evidence that a tentative cease fire with militants targeting Nigeria's oil infrastructure is holding, while Canada's recovery from its devastating forest fires continued.

Brent Crude fell to $49.41, down $0.30 or 0.6% and was tracked lower by West Texas Intermediate prices, down to $48.05, a fall of $0.28 or 0.6%.

In late May, the combination of Canada's fires and Nigeria's insurgency, took close to 2 million barrels of oil per day out of the market, helping to temper global oversupply and boost oil prices above $50 a barrel.

Canadian oil production, which had fallen by just over 1 billion barrels a day during the fire's peak, has bounced back. As of this week only about 400,000 barrels per day of production remained offline. They are expected to return by mid-August, leaving Canadian production near its 2015 average of just under 4 million barrels.

The comeback by Nigeria, Africa's largest oil exporter, remains less sure. During periods of relative peace, Nigeria has been able to produce as much as 2.5 million barrels of oil per day, though it last hit that mark a little over 10 years ago. The nation's output has run closer to 2 million barrels a day in recent years, still a third under government plan, but dipped to as low as 1.5 million barrels in May amid an uptick in violence in the key southern oil producing region of the Niger Delta.

The attacks are the work of various militant groups, some with wider political aims and others simply disillusioned at the squandering of wealth and the environment that has left the Niger Delta polluted and poor. The largest group, though they probably only number in the hundreds, is the Niger Delta Avengers, or NDA. It emerged in late 2015 after new President Muhmmadu Buhari cut payments to former Niger Delta militants by two-thirds and ended a program of hiring the same people to guard oil infrastructure.

Attacks by militants, largely in the form of pipeline sabotage, cut Nigerian production by about 400,000 barrels a day from February to June, according to Goldman Sachs. Theft and pipeline leaks, which often are one in the same, reduced output by a further 200,000.

On June 20 the Nigerian government said it had agreed a one-month ceasefire with a handful of militia groups including the NDA, though a twitter account linked to the NDA claimed the group was unaware of any deal. Nonetheless attacks in the Niger Delta have all but ceased, and production has increased by as much 300,000 barrels a day. The ceasefire remains a work in process. It is due to end in 20 days and a return to violence could quickly reverse Nigeria's output gains.

If the peace holds it will have important implications for an oil market that remains little prepared to take on extra supply whilst ever Saudi Arabia runs its pumps at high capacity in an effort to drown Iran's efforts to grow its market share.

Analysts have tipped demand to outstrip supply by between 300,000 and 400,000 barrels a day over the second half of 2016 - an imbalance that is needed to strip out deep inventories and support oil at or above $50 a barrel. Growing Nigerian ouptut will rest a heavy hand on the supply side of the scales, pushing down on oil prices and the wider markets. 

"When oil goes up..the market goes up," Jim Cramer said Thursday as he reflected on the second quarter. "There isn't much more to it. I wish there was."  

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