Disruptions Offset U.S. Crude Oil Inventory

The concerns over the growing record-high U.S. crude oil stockpiles have been countered by disruptions in Nigeria and Canada, both of which export oil to the country. On Tuesday, May 10, it was reported that U.S. oil rose by 2.8 percent due to the outages experienced in the two countries.

Reuters correspondent Barani Krishnan cited the following numbers: “Brent (LCOc1) settled up $1.89, or 4.3 percent, at $45.52 per barrel. More than 6,000 contracts changed hands in the final minute, Reuters data showed. The global oil benchmark rose to as high as $45.70 in post-settlement trading. After the settlement, it briefly dipped more than 30 cents on the API data, then recovered to near its settlement price. U.S. crude's West Texas Intermediate (WTI) futures (CLc1) rose 1.22, or 2.8 percent, to settle at $44.66. WTI also fell briefly on the API data. Refined oil products joined the rally, with gasoline (RBc1) closing up 3 percent and ultra low sulfur diesel (HOc1), or heating oil, 4 percent.” 

Stockpile Basics

As a Learning Markets feature indicated, “The more oil commercial firms have in inventory, the less demand these firms will have for oil in the future and the cheaper the price of oil will become.” Consequently, it stated, “The less oil commercial firms have in inventory, the more demand these firms will have for oil in the future and the more expensive the price of oil will become.”

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The stockpile levels are, of course, influenced by other factors — which include force majeure incidents that cannot be easily controlled or predicted. This is why oil industry watchers are told, “Don't read the news in a vacuum.” It helps to be clued in on what's happening around the world. In this case, it means being aware of what exactly happened in Nigeria and Canada.

Tension in Nigeria

Nigeria is Africa's largest oil producer, but a series of attacks on its oil infrastructure has pushed its crude output close to a 22-year low. According to data compiled by Bloomberg, production has fallen below 1.7 million barrels a day since 1994.

As Bloomberg further explained, this is not the first time that Nigeria's oil industry has been violently disrupted by militants. From 2006 to 2009, the self-proclaimed Movement for the Emancipation of the Niger Delta and other breakaway groups launched similar attacks. The attacks abated after thousands of fighters were granted amnesty by then-President Umaru Musa Yar’Adua. However, in some cases, the government agreed to make monthly payments in order to ensure the safety of the oil facilities.

But current President Muhammadu Buhari has vowed to stamp out corruption and oil theft. Hence, the attacks.

“Pipeline attacks and violence have risen in Nigeria's southern swampland since authorities issued an arrest warrant in January for a former militant leader on corruption charges,” reported Tife Owolabi for Reuters.

In February, militants targeted a Shell (RDSa.L) oil pipeline and shut down the 250,000 barrel-a-day Forcados export terminal. Earlier this month, a group of militants called the Niger Delta Avengers attacked the facility of Chevron Nigeria Limited, an operator of a joint venture with the Nigerian National Petroleum Corporation (NNPC). Just recently, a militant threat led to the evacuation of Shell personnel at Nigeria's Bonga oil field in the southern Niger Delta.

Wildfire Threat in Canada's Fort McMurray

In Canada, a recent wildfire affected Alberta's Fort McMurray, which is known for having the largest oil sands reserve in the world. The Fort McMurray-based oil facilities were forced to shut down as a precaution. According to Reuters, “initial inspection by officials showed the Canadian energy boom town was spared the worst.” Oil companies are looking forward to resume production, but displaced residents — many of them workers in Fort McMurray's oil industry — have to take time to rebuild their homes.

“If the output is low for an extended period, it may have a significant effect on Canada’s economy. The oil sands contribute 2.1 million barrels to Canada's total daily production of 3.9 million barrels. Nearly all of it is sent to the United States,” reported Ian Austen in The New York Times. He added, “Restarting the large projects after a shutdown can take months and be hugely expensive.”

Impact Assessment

As always, the next question is this: “Until when will excess stockpile worries be kept at bay?”

The Vanguard cited a note that Societe Generale had sent to its clients. It had stated, “Despite some significant supply disruptions, most notably in Canada, ongoing bearish fundamentals precipitated a modest retracement in price.”

The Vanguard report pointed out that “with plenty of crude available, refiners have produced large volumes of gasoline and diesel, threatening to swamp demand despite the coming U.S. summer driving season.”

The same sentiment was expressed by Oystein Berentsen, managing director for crude at Strong Petroleum in Singapore. He told the Vanguard, “Crude cannot go up without support from products, and that support is not there at the moment, and more refineries are coming out of turnarounds so there will be more products and tanks are getting full.”