Following months of oversupply, the oil market has now found an unlikely “friend” in the form of militant activity. Last month saw unplanned outages reaching a record high as attacks from Niger Delta Avengers hit major global oil suppliers and Canada saw an estimated 1.2 million barrels a day knocked offline due to forest fires in Alberta.
This has caused excess supply to dwindle and as a result, prices have rallied higher and an estimated US$15/bbl has been added to the oil price. But while the outages have had a positive effect on speeding up the erosion of a supply glut, how can we be sure they will not have longer term implications for the market?
In Nigeria, the Niger Delta Avengers (NDA) have been targeting infrastructure belonging to RD Shell, Chevron, ENI and others and as a result production has fallen to a twenty year low of 1.6mmbbl/d.
The NDA want a share of the oil wealth for the residents of the Delta region and they have repeatedly rebuffed government attempts for a truce. And given the longevity of the NDA’s militancy and their strong intent to shut down production, I am not convinced the situation will be resolved any time soon.
Looking to the Middle East, the situations in Syria and Libya have also resulted in further declines in production. Hopes for Libya to return to pre-civil war levels look increasingly unlikely and it is evident that Syria is nowhere near close to being resolved. But when do these outages switch from being short term “inconveniences” to being calculable structural changes to the market?
Although certainly a shorter term problem than militancy, extreme weather has been another major and unpredictable catalyst in the disruption of global oil production. The recent wild fires in Canada knocked out almost 1mmbbl/d of production with only a fraction of that supply coming back to market. With the impact of climate change becoming more apparent, weather related outages due to wildfires or flooding will only become more common and market awareness of such events needs to be higher given the potential impact.
So what does this mean? Really the market needs to stop viewing these unplanned outages as short term blips and see them for what they are – long term events. Analysis such as “Factor X has added Y dollars to the oil price” isn’t a useful way to think about things as it suggest that when Factor X goes away the oil price falls by Y. Taking Nigeria as an example, rebuilding infrastructure takes time and more importantly money.
Given how focused the supermajors are on capex they will inevitably ask the question “should we rebuild it”? If the answer is no then that production won’t be coming back making that short term event permanent.
Given these outages, declining non-OPEC supply, hugely reduced investment in new projects and increasing demand for oil, there will come a point in the not too distant future where the market is undersupplied.
At this point we can therefore expect oil prices to significantly increase from today’s level, resulting in increased revenues, cash flow and dividends and the sector being back in favour again in the equity markets.
Dougie Youngson is an oil and gas analyst at FinnCap