Nigeria & Oil: Still Relevant?

July 06, 2009

How oil prices respond to militant attacks on Nigerian pipelines and pumping stations.
  • A scary economy trumps pipeline disruptions
  • Context and timing are key
  • Quota cuts moot?


At the end of June, the oil market got something it hadn't had in a while: news of actual, real-life supply shock. After months of declining demand reports and inventories that are quite robust, the unrest in Nigeria gave people something bullish (admittedly not happy) to add to their buy/sell equations.

On the surface, what happens in Nigeria should matter to the U.S. oil market. They need us: 44% of oil exported from Nigeria makes its way to the U.S. in April. We need them: Crude oil from Nigeria made up 7.2% of all of the crude oil imported to the U.S. in the same period. Historically, we should care even more: Since January of 2007, Nigerian oil has accounted for an average of 9.6% of all crude oil imported into the U.S. - with some months registering over 12%. With such a large percentage of one country's oil going to the U.S. and accounting for almost 10% of imports, it's not surprising that what happens in Nigeria has repercussions across the global oil market.

Here's the problem: Since 2005, Nigeria has not been a very stable place for oil companies, and the kidnapping of ex-pat oil workers has been an active business for militants for years. In fact, during the 18 months from the beginning of 2006 to mid-2007, 200 foreign workers had been kidnapped in Nigeria. Militant attacks on pipelines and pumping stations have also been occurring for years, taking oil off the market for weeks or months at a time.

As an investor, headline conventional wisdom says these attacks should have had bullish effects on oil prices. So let's take a look at just a few of the attacks and how oil prices seemed to respond in the very short term.



Crude Oil % Change From Previous Day
May 7, 2007 61.48 -0.7%
May 8, 2007 62.26 1.3%
May 9, 2007 61.54 -1.2%


On May 8, 2007, three oil pipelines in the Niger Delta were blown up by Nigerian militants protesting the election of Yar'Adua. The explosions forced leading Italian oil company Eni to halt production of 150,000 bpd. Around this time, the price of oil had been dropping anywhere from 0.5% to 2% each day for the preceding week. On the day Eni halted production, oil rose 1.3% from $61.48 to close at $62.26. Seems perfectly logical.



Crude Oil % Change From Previous Day
May 2, 2008 116.36 3.3%
May 5, 2008 119.94 3.1%
May 6, 2008 121.82 1.6%


About a year later, on May 3, pipelines owned by Royal Dutch Shell were attacked by the Movement for the Emancipation of the Niger Delta (MEND) and 170,000 bpd were disrupted. Oil prices rose 3.1% on the next trading day; however, oil was already on a tear for any number of reasons, including Iran, sunspots, etc.


Crude Oil % Change From Previous Day
June 19, 2008 131.68 -3.4%
June 20, 2008 134.78 2.4%
June 21, 2008 135.98 0.9%


June 20 - The Royal Dutch Shell Offshore oil platform Bonga was attacked. This was the first successful offshore oil platform attack by Nigerian militants. Bonga produces 200,000 bpd - which meant that one-tenth of Nigeria's oil output was taken off-line with one attack. Oil prices rose 2.4% during the day. Note however that at this point we're near oil's peak, and a 2-3% day in oil is practically the norm.


Crude Oil % Change From Previous Day
Sept 12, 2008 101.19 0.2%
Sept 15, 2008 95.52 -5.6%
Sept 16, 2008 91.49 4.2%
Sept 17, 2008 97.39 6.2%
Sept 18, 2008 97.5 0.1%
Sept 19, 2008 104.05 6.7%
Sept 22, 2008 122.61 17.8%
Sept 23, 2008 107.85 -12.0%


September saw three days of militant actions between 9/15 and 9/18. Royal Dutch Shell's flow stations at Akrotiri were attacked and multiple pipelines were bombed. Oil prices rose 4.2% on 9/16, 6.4% on 9/17, 0.1% on 9/18 and 6.7% on 9/19. But it wasn't news from Nigeria that was fueling the big jumps. On 9/20, the Bush administration announced the $700 billion bailout, which sent oil prices up 17.8% the following Monday as people scrambled for commodities exposure (and seemingly bailed out shortly afterward). Let's just say a scary economy trumps pipeline disruptions.




I think that paints the picture, but let's look briefly at what's happened in 2009 so far:


Crude Oil % Change From Previous Day
March 6, 2009 45.43 4.3%
March 7, 2009 47.01 3.5%
March 9, 2009 45.68 2.8%


On March 7, Royal Dutch Shell declared force majeure on Forcados oil shipments due to pipeline explosions. Oil prices rose 3.5% during the day from $45.43 to $47.01.


Crude Oil % Change From Previous Day
May 22, 2009 61.15 1.1%
May 26, 2009 62.48 2.2%
May 2,7 2009 63.41 1.5%


On May 25, Chevron shut 100,000 bpd of production due to militant strikes, and oil prices responded by going up 2.2% to $62.48 the next trading day.


Crude Oil % Change From Previous Day
June 22, 2009 67.09 -3.6%
June 23, 2009 68.81 2.6%
June 24, 2009 68.14 -1.0%
June 25, 2009 69.7 2.3%
June 26, 2009 69.16 -0.8%
June 29, 2009 71.47 3.3%
June 30, 2009 69.82 -2.3%


On June 23, Eni declares a force majeure on shipments. Crude oil prices rise 2.6% on the day, after falling 3.6% the day before, but then give much of that back the day after.

On June 29, Royal Dutch Shell announced that it shut production to investigate reports of recent attacks by militants. The exact amount of production shut in was not announced, but the market still moved up 3.3% on the day. The news must not have been that bad, if you look at oil prices, because oil dropped 2.3% the very next day.


What Does It All Mean?

The point (and yes, there is one) of this detailed history lesson is simply this: Context matters, and it matters a lot when it comes to news.

You could interpret the beginning of this lesson this way: Since oil rises, at least modestly, on bad news from Nigeria, you should trade into the news as soon as possible. Sounds easy, but getting that timing might be nearly impossible. And worse, as the situation in Nigeria has continued to deteriorate, the real impact of another piece of bad news starts to mitigate, meaning it is all the more likely that "headline gains" will be given back extremely quickly.

Plus there is a lot more going on than unrest in Nigeria that affects oil prices - OPEC, for one. The market waits with baited breath to see if a quota cut will be announced - though even in beleaguered Nigeria it's clear they have no teeth. Nigeria's upper limit is currently set at 1.67 million bpd - roughly 70,000 bpd less than what the state-run oil company says was pumped in June even after all the chaos. Reuters' survey reports that Nigeria will produce 2 million bpd in July and 1.64 million bpd for August.

It's all about context. With lower oil demand and lower imports coming from Nigeria, news out of Nigeria moves oil a bit less.


Total US Imports vs. Imports from Nigeria


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