More adjust to sudden oil supply disruptions
Traders prepared to make allowances for global incidents
With oil markets stuck in a slump for two years now, it’s easy to forget how much a sudden loss of supply can impact prices.
But the U.S. Energy Information Administration reminds us of that risk in a new report that puts “unplanned” oil supply disruptions throughout the world at a five-year high in May.
In all, an average of more than 3.6 million barrels a day was lost to outages, 800,000 barrels a day more than in April, according to the government agency, which started tracking such developments in 2011.
Most of those setbacks occurred in Canada, Nigeria, Iraq and Libya.
The surge in disruptions, combined with other factors such as growing oil demand and declining U.S. oil production, contributed to a $5-per-barrel increase in prices for Brent crude, the international benchmark, in May.
“There’s a concern that the overall global surplus is not quite as robust as people might have thought six months ago,” John Hofmeister, the former president of Shell Oil, said of the EIA findings. “The bottom line is that nobody really knows for sure how much oil is available on a day-today basis. Everything you read is a best guess.”
To be sure, not all of the recent interruptions in oil supply resulted from political turmoil or warfare, factors which have historically been the biggest cause of panic in petroleum markets.
Canada’s production fell by an average of 800,000 barrels a day because of wildfires in Fort McMurray, Alberta, which forced the evacuation of personnel in the region’s oil sands.
Since late May, workers have begun to return to the area, and production is gradually resuming.
Mother Nature was a culprit in Iraq, where production declined by 50,000 barrels a day because of inclement weather in the Basra Gulf as well as power outages.
But elsewhere, oil was lost because of violence, as has often been the case in the Middle East and Africa.
An escalation in militia attacks on oil infrastructure cost Nigeria an average of 800,000 barrels a day in May, or 250,000 barrels a day more than went missing because of such troubles in April.
All told, Nigeria’s production fell to 1.4 million barrels a day, the lowest level for the country since the late 1980s.
EIA expects Nigeria’s disruptions to remain relatively high through 2017.
In Libya, exports from Marsa al-Hariga, the country’s largest operating oil terminal, were temporarily halted in late April and early May, taking 50,000 barrels a day off the market.
Exports from the Libyan terminal restarted after rival state oil companies reached an agreement.
But EIA noted that “disruptions tied to political disputes or conflicts often last for years.”
In an interview, Hofmeister said oil traders are taking such incidents into account more now than they have over the past few years, when surging production outside of the Organization of the Petroleum Exporting Countries, especially in the U.S., resulted in a huge global surplus of oil.
“You would read about a spectacular fire or something at a tank farm in Libya, and the oil price wouldn’t move,” said Hofmeister, who was recently named chairman of Erin Energy, a Houstonbased independent producer with exploration and production projects off the coasts of Nigeria, Ghana, Kenya and Gambia.
“Now, when you see other signals of a tightening market, like in the U.S., the disruptions come back into play in terms of daily adjustments in oil prices.”
That’s likely to remain the story now that oil companies have cut hundreds of millions of dollars from their exploration and production budgets, and U.S. oil production is down 1 million barrels a day from a peak of 9.7 million barrels a day in April 2015.
Hofmeister predicts that an eventual recovery in U.S. oil production will “go very slowly,” given the rash of bankruptcies among producers and their suppliers, and the difficulties that many operators face in obtaining loans from banks.
Still, with fewer mergers and acquisitions in the oil sector than some analysts expected, more struggling companies may manage to survive until prices rise to higher levels, and stay there.
“Why sell out?” he asked. “Just hang on as long as you can keep your bank happy … because the good times will return.”