HardAssetsInvestor

Written by Julian Murdoch  |

July 06, 2009

Nigeria & Oil: Still Relevant?

Details

How oil prices respond to militant attacks on Nigerian pipelines and pumping stations.

• A scary economy trumps pipeline disruptions
• Context and timing are key
• Quota cuts moot?

 

At the end of June, the oil market got something it hadn't had in a while: news of actual, real-life supply shock. After months of declining demand reports and inventories that are quite robust, the unrest in Nigeria gave people something bullish (admittedly not happy) to add to their buy/sell equations.

On the surface, what happens in Nigeria should matter to the U.S. oil market. They need us: 44% of oil exported from Nigeria makes its way to the U.S. in April. We need them: Crude oil from Nigeria made up 7.2% of all of the crude oil imported to the U.S. in the same period. Historically, we should care even more: Since January of 2007, Nigerian oil has accounted for an average of 9.6% of all crude oil imported into the U.S. - with some months registering over 12%. With such a large percentage of one country's oil going to the U.S. and accounting for almost 10% of imports, it's not surprising that what happens in Nigeria has repercussions across the global oil market.

Here's the problem: Since 2005, Nigeria has not been a very stable place for oil companies, and the kidnapping of ex-pat oil workers has been an active business for militants for years. In fact, during the 18 months from the beginning of 2006 to mid-2007, 200 foreign workers had been kidnapped in Nigeria. Militant attacks on pipelines and pumping stations have also been occurring for years, taking oil off the market for weeks or months at a time.

As an investor, headline conventional wisdom says these attacks should have had bullish effects on oil prices. So let's take a look at just a few of the attacks and how oil prices seemed to respond in the very short term.

 

2007

	Crude Oil	% Change From Previous Day
May 7, 2007	61.48	-0.7%
May 8, 2007	62.26	1.3%
May 9, 2007	61.54	-1.2%

 

On May 8, 2007, three oil pipelines in the Niger Delta were blown up by Nigerian militants protesting the election of Yar'Adua. The explosions forced leading Italian oil company Eni to halt production of 150,000 bpd. Around this time, the price of oil had been dropping anywhere from 0.5% to 2% each day for the preceding week. On the day Eni halted production, oil rose 1.3% from $61.48 to close at $62.26. Seems perfectly logical.

 

2008

	Crude Oil	% Change From Previous Day
May 2, 2008	116.36	3.3%
May 5, 2008	119.94	3.1%
May 6, 2008	121.82	1.6%

 

About a year later, on May 3, pipelines owned by Royal Dutch Shell were attacked by the Movement for the Emancipation of the Niger Delta (MEND) and 170,000 bpd were disrupted. Oil prices rose 3.1% on the next trading day; however, oil was already on a tear for any number of reasons, including Iran, sunspots, etc.

 

	Crude Oil	% Change From Previous Day
June 19, 2008	131.68	-3.4%
June 20, 2008	134.78	2.4%
June 21, 2008	135.98	0.9%

 

June 20 - The Royal Dutch Shell Offshore oil platform Bonga was attacked. This was the first successful offshore oil platform attack by Nigerian militants. Bonga produces 200,000 bpd - which meant that one-tenth of Nigeria's oil output was taken off-line with one attack. Oil prices rose 2.4% during the day. Note however that at this point we're near oil's peak, and a 2-3% day in oil is practically the norm.

 

	Crude Oil	% Change From Previous Day
Sept 12, 2008	101.19	0.2%
Sept 15, 2008	95.52	-5.6%
Sept 16, 2008	91.49	4.2%
Sept 17, 2008	97.39	6.2%
Sept 18, 2008	97.5	0.1%
Sept 19, 2008	104.05	6.7%
Sept 22, 2008	122.61	17.8%
Sept 23, 2008	107.85	-12.0%

 

September saw three days of militant actions between 9/15 and 9/18. Royal Dutch Shell's flow stations at Akrotiri were attacked and multiple pipelines were bombed. Oil prices rose 4.2% on 9/16, 6.4% on 9/17, 0.1% on 9/18 and 6.7% on 9/19. But it wasn't news from Nigeria that was fueling the big jumps. On 9/20, the Bush administration announced the $700 billion bailout, which sent oil prices up 17.8% the following Monday as people scrambled for commodities exposure (and seemingly bailed out shortly afterward). Let's just say a scary economy trumps pipeline disruptions.