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Schork Oil Outlook: Don’t Blame Nigeria

Stephen Schork, Editor, The Schork Report
Tuesday, 30 Jun 2009 | 10:28 AM ET

ENERGY PRICES WERE MIXED ON MONDAY… liquids markets in London and New York surged because… because… because all bad news (e.g. IEA lowers global demand outlook) is ignored and all less bad news (attacks on Nigeria’s already decrepit oil complex) is exaggerated. Meantime, natural gas futures in New York tanked.

Crude oil prices in London and New York received a jolt yesterday after headlines began to carry reports of the latest batch of rebel attacks on oil interests in Nigeria. Once again the main militant group – the Movement for the Emancipation of the Niger Delta, aka MEND – took responsibility for attacks on facilities near Shell’s Forcados terminal.

Meantime, the other newsworthy headline from yesterday came from the International Energy Agency (IEA). According to the body’s latest monthly survey, the IEA slashed its medium-term forecast for oil demand. It now expects that demand will grow by 0.6% - the equivalent of 540,000 barrels per day on average - between 2008 and 2014. That is down from its previous forecast, issued in December, of demand growing by a million barrels per day.

Guess which headline the market chose to focus on?

While U.S. dependence on imports from Nigeria is significant, the reliance on those barrels has dropped dramatically this year. There is still a lot of oil out there… and demand for it is still very questionable. As such, well defined contangoes on the futures curves in London and New York persist. While the material discounts to the deferred contracts we saw in the first quarter have narrowed this quarter, the discounts endure nonetheless.

In other words, the market is still discounting spot barrels. That means the market is still discounting nearby demand prospects, which means there is no real excuse for yesterday’s end-of-quarter spike other than the notion that the… end-of-the-quarter …was the reason for the spike.

Meantime, as far as those Nigerian headlines are concerned, U.S. imports from Nigeria through the first four months of this year have been cut in half, down 63.4 MMbbls from the first four months of 2008. Consequently, Nigeria’s share of the U.S. import market dropped from 11% to 6% year-on-year and the country has since slipped from the fifth largest supplier of oil to the United States to the sixth largest supplier. What’s more, Iraq, the seventh largest supplier of oil to the U.S., is soliciting bids from 35 international oil groups to help develop that country’s oil and gas infrastructure. The first postwar bidding for oil service contracts is currently being challenged by Iraq’s mostly autonomous Kurdistan region.

However, odds are short the central government in Baghdad will get the bids passed through. Iraq’s goal is to boost production from its current pace of 2.3 MMbbl/d to 2.6 MMbbl/d by the end of this year and to 2.8 MMbbl/d within two years. As such, Iraq will likely pass Nigeria as the sixth largest supplier of oil to the U.S. by this point next year.

Bottom line, for all intents and purposes, the extant turmoil in Nigeria hurts that country more so than the United States.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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