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Oil Outages Come Back Online, Cause Large Downside Risk

Oil Rig

A month ago fires raged in Alberta, militants attacked oil fields in the Niger Delta, U.S. shale production was plummeting – and oil prices were capping off a spectacular rally, rising more than 80 percent in three months.

But by the end of June and early July, the bullish sheen on the oil markets is wearing off.

In May, Canadian oil producers had to shutter facilities and evacuate workers. The entire city of Fort McMurray was abandoned for weeks. Canada saw production plunge by more than 1 million barrels per day (mb/d), taking huge volumes off of the global market.

Nigeria also contributed to the market tightening. The Niger Delta Avengers were on a rampage a few weeks ago, successfully pulling off attack after attack, blowing up pipelines, platforms, and oil wells. The companies they targeted were household names – Chevron, Shell, Eni. The Niger Delta Avengers threatened to take Nigeria’s oil production to “zero.” The situation was so bad that oil companies had no clue when and if they could get personnel in to repair their damaged infrastructure. The potent and shockingly successful attacks from the Niger Delta Avengers quickly caused Nigeria’s oil production to plunge from 2.2 mb/d down to somewhere between 1.1 and 1.4 mb/d, the lowest level in nearly three decades.

The two massive outages in Nigeria and Canada essentially tipped the global oil market from a supply surplus of about 1.3 mb/d into a deficit. More losses could be found around the world: The U.S. saw output fall to about 8.7 mb/d, down more than 900,000 barrels per day from a peak 14 months earlier; smaller losses are taking place in Venezuela, Mexico, Colombia, and more. In short, global supply outages hit a five-year peak in early June.

But some of those outages were only temporary, and a few weeks on from these surprising disruptions, output is starting to come back online. Canada may have lost more than 1 mb/d as oil sands producers fled wildfires, but the fires were never going to keep production offline permanently. It will take years for Fort McMurray to recover, but Canada’s oil companies are already getting back to work. Related: $13 Billion Oilfield Services Merger Set To Move Forward

The U.S. has also seen its contraction slow. The oil industry added almost two dozen rigs in early June, halting a year-long slide. A few companies are starting to drill again, raising the prospect of new production.

The developments in the Niger Delta are even more surprising. The Niger Delta Avengers and the Nigerian government recently agreed to a temporary ceasefire. The period of calm has allowed for companies to make repairs and bring production back. Nigeria’s oil minister Emmanuel Ibe Kachikwu told Bloomberg on June 27 that the country’s oil output has climbed from 1.4 mb/d to 1.9 mb/d in June. He hopes that further gains can be achieved in July, hopefully bringing production back up to 2.2 mb/d, pending pipeline repairs.

This is great for Nigeria, but bad for oil producers elsewhere. Goldman Sachs now says that the ceasefire could contribute to oil prices falling below $50 per barrel in the second half of this year if Nigeria is able to bring all of its production back. There are more questions than answers coming out of Nigeria, making any prediction difficult. But Goldman Sachs says that it “cautiously” expects about 350,000 barrels per day in Nigeria to remain offline, outages that could conceivably balloon to 1.1 mb/d if attacks from the Avengers resume. On balance, the bank is projecting $50 oil this year, but the ceasefire could cause prices to surprise on the downside. “The path of future Nigerian production remains uncertain in the absence of a sustainable agreement,” Goldman Sachs wrote in a recent report. Related: Is Wall Street Right About Electric Utility Stocks?

The slightly pessimistic outlook for oil prices comes from more places than just Goldman Sachs. Oil futures are showing a widening contango at the end of June, an indication that the markets expect a larger near-term surplus than in previous weeks. Speculators increased net-long positions for the week ending on June 21, but only for the first time in five weeks. "Short-term supply conditions look overwhelmingly bearish," Georgi Slavov, global head of energy, iron ore and shipping research at Marex Spectron, wrote in a report this week.

Although there are a handful of wild predictions out there, such as this prediction calling for oil to plunge to $10 to $20 per barrel this year, most analysts see little change ahead. A collection of 118 energy analysts surveyed by Bloomberg found that 62 percent of them expected WTI to end the year at $50 per barrel, largely unchanged from today’s levels. Not incredibly bearish, but certainly not bullish either. Only 23 percent of them see oil prices above $55 per barrel this year.

Oil prices may have rallied 80 percent from their February lows, but most analysts don’t see the rally continuing.

By Nick Cunningham of Oilprice.com

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