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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Quiet Swing Producers: Iraq, Libya, Nigeria

With the whole oil world watching the latest news around Iran and the U.S. sanctions that seek to reduce its exports of crude to zero, an announcement by Iraq’s Energy Minister passed largely unnoticed. The announcement was, as reported by Bloomberg, that Iraq’s oil production rate had hit a record-high of 4.78 million bpd, which made the OPEC member the world’s fourth-largest oil producer, ahead of Canada.

One might wonder how this is significant, but only if this one is somebody who has only been focusing on Iran lately. Iraq’s in the second-largest producer in OPEC after Saudi Arabia, and it is a very politically unstable country. The higher its production, the greater its share of the overall increase in output that the cartel is attempting, and so far, failing to achieve in a bid to offset the shortage from Iran.

And Iraq is not the only large producer that can swing prices higher or lower. Count Libya and Nigeria in as well. In Libya, the danger of production outages should be factored into prices on general principle given the frequency of these outages. The North African country has proved quite effective in reducing the duration of these outages, but any supply disruption from the Oil Crescent will immediately affect international prices.

Then there is Nigeria. While militant attacks on infrastructure in the Niger Delta have stopped after the federal government managed to convince the militants to lay down their arms, this does not mean it is all quiet in Africa’s top oil exporter. RBC’s Helima Croft, for example, told CNBC this week that with elections pending in both Libya and Nigeria, supply could be threatened. RBC also warned its clients that half a million barrels daily could be wiped out from the combined production of Nigeria and Libya after the elections.

Yet elections in Nigeria are still months away. The worry that the next government could take a different approach to Niger Delta militants and these groups might resume their attacks on infrastructure is still in the realm of the hypothetical. Besides, any effect from the change of government in Nigeria will come even later. By then, the actual impact of U.S. sanctions on the Iranian oil industry should be evident, stabilizing prices, albeit temporarily. Related: Is There Too Much Light Crude On The Market?

Libya’s elections may be a more direct threat for oil prices. Scheduled for December, the presidential and parliamentary votes might not even take place, according to a September update from the UN envoy to the country. "There is still a lot to do. It may not be possible to respect the date of December 10," the envoy, Ghassan Salame, told AFP. And yet, violent clashes in Libya have regrettably become more or less a part of life, and the National Oil Corporation has become rather effective in dealing with them so as to minimize the impact on production. Given Libyan’s dependence on oil revenues, this effectiveness is only to be expected.

Here’s what Vandana Hari, founder of Vanda Insights, a Singapore-based provider of research and analysis on the global oil markets, had to say about this. “If—and that’s a big if—both Libyan and Nigerian production is affected and it is as bad in Libya as the incident this summer, we could see 600-700,000 bpd disappear from the market. That would surely have OPEC running on fumes if it is already stretched covering the loss of barrels from Iran. However, if it is just Libya or Nigeria and the problem is it a prolonged one, OPEC may be able to compensate and we wouldn’t necessarily see a sustained spike in crude.”

Ole Hansen, Saxo Bank’s head of commodity strategy told Oilprice there was no doubt that the outages, if materialized, would increase the market volatility. “Additional uncertainty about supply on top of Iran,” Hansen said, “should support the price while reducing the current focus on a demand destructive global slowdown.”

So perhaps the danger of Brent hitting US$100 a barrel as a result of production outages in Iraq, Libya or Nigeria may be a little bit overblown in light of the fact that such outages are far from certain. On the other hand, these three certainly bear watching, in addition to Iran. It pays to be prepared, after all.

By Irina Slav for Oilprice.com

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