Oil prices rose sharply on Monday, as fresh attacks by Nigerian militants on oil installations took the markets by surprise. Nigeria’s main militant group said it launched attacks on an oil facility belonging to Royal Dutch Shell, this only days after Nigerian President Umaru Yar’Adua came up with an amnesty offer that seemed to be gaining traction. A mainstream MEND group dismissed the government’s advance on Monday, saying it “will negotiate as a group when the right time comes”. It also denied earlier reports that some of its representatives have agreed to an amnesty proposal. In the meantime, Shell said it shut in some production as a precautionary measure while it investigates reports of disruptions.
Despite Monday’s sharp advance, we don’t think the Nigerian attacks alone will have what it takes to sustain energy prices above their recent highs. The attacks are simply not a new variable in the energy equation, and certainly not a “game-changer” on the supply/demand side of things. However, given that prices have nevertheless responded positively to the news of the attacks, it stands to reason that we could see equally sharp retreats if the attacks fade in frequency, or if the militants are persuaded to accept an amnesty offer. In this regard, there was an important development that took place late on Monday evening when the Nigerian President told his interior minister to offer amnesty to militant rebel leader Henry Okah, who is being held by the government on charges of gun-running and treason. The MEND has made Okah’s release one of its key demands.
Outside of Nigeria, crude’s fundamentals do not look that constructive. More evidence of this came our way from the IEA, which on Monday cut its medium-term forecast for oil demand. The agency now sees the possibility of long-term average demand growing by just 40,000 barrels per day between 2008 to 2014, down from growth of 1.0 mbpd a year projected in December. On the flip side, the IEA says that while demand growth has fallen, investment in new supplies has also shrunk, and it is therefore not ruling out a shortfall in supplies in the out years. The IEA estimates that since last year, around 2 mbpd of new oil capacity has been deferred indefinitely, and that a further 4 mbpd faces delays of 18 months or more. Even so, we find it hard to get too alarmed about looming shortages when spot demand remains weak, while storage tanks are full. In fact, the IEA itself is not that upbeat about price prospects over the medium term, expecting nominal prices of $51 for this year, rising to $58.9 a barrel in 2010.
At the time of this writing, prices are up sharply once again, although we don’t see anything new in terms of headlines, and suspect that the Nigerian news is still stirring things up, as is the slightly weaker dollar. However, as we wrote earlier, we would be very wary about chasing this latest bounce on Nigerian tensions alone. July NYMEX products expire later on Tuesday...
In Other News from Reuters...
* The IEA said that lower energy spending should take its toll on non-OPEC supply, which the IEA now expects to decline by +0.4 million bpd between 2008-14 compared with its previous prediction of +1.5 million bpd. OPEC members are expanding supplies more slowly than previously thought, adding 1.7 million bpd of additional supply capacity by 2014, almost half the increase previously expected. Total capacity growth was now stands at 4.2 million bpd compared with 5.5 million bpd in its last outlook, the IEA said.
* US oil demand in April was 216,000 bpd above the previous estimate of 18.255 mbpd, according to the EIA, but still down from 19.768 mbpd seen a year earlier. Gasoline demand for April was down 90,000 bpd, to 8.948 mbpd, while gasoline consumption was down 169,000 bpd. Distillate demand was revised down from the previous estimate to 3.46 mbpd, off by about 16% on the year.
* Complex refining margins on the Mediterranean fell minus 7 cents a barrel last week, according to Reuters. Margins on Brent fell about 80 cents to $2.44 a barrel. In the U.S. Gulf, refiners running WTI saw margins down about $1.50 to $3.23 a barrel. In Asia, plants running Dubai saw margins up by 43 cents to average $3.12 last week. Credit Suisse calculations show refining margins in the US Gulf Coast fell last week by $3.80 to $6.62 a barrel. In the Midwest, margins were down $3.61 to $9.34 a barrel, and in the Northeast, margins fall by $2.97 to $4.88 a barrel. West Coast margins were down $2.80 to $10.28 a barrel.
* On a related topic, the IEA said refining margins will remain weak for the next five years, as the agency cited the cost of meeting environmental regulations and increased capacity. In the latter regard, oil companies are expected to add an estimated 7.6 mbpd in new crude processing capacity between 2008 to 2014. In addition, refiners are also expected to add an estimated 7.9 mbpd of hydrotreating or desulphurisation capacity and 6.5 mbpd of upgrading capacity by 2014.
* Qatar’s Oil Minister said he does not believe that OPEC will need to increase output when it meets next. He did say that there are signs of increased demand from Asia, but that current oil prices are not related to the supply and demand balance.
* The IEA said Iraqi plans to raise oil output to 6 mbpd by 2017 are likely overly optimistic. It said capacity could fall over the next two years to as low as 2.23 mbpd and then rise to 2.7 mbpd by 2014. Current production is now between 2.3 and 2.4 mbpd.
* Exxon Mobil said operations were normal at its 150,000 bpd refinery in Torrance, California, after an earlier upset.
* China unexpectedly increased gasoline price by 9% and diesel prices by 10%. With prices at just over $3 a gallon, Chinese motorists will now pay more than U.S. drivers. In addition, jet fuel prices went up 22%.
* Global gas demand is likely to fall this year, according to the IEA. “We have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices,” the head of the IEA was quoted as saying. It also added that unless several new LNG projects are approved in the next 18 months, there will be lack of capacity after 2012.
* Italy’s Prime Minister said that the G8 will discuss the current situation in Iran at its summit in Italy next week and that the group is likely to propose sanctions.
* President Obama’s top energy adviser said she was confident the Senate will pass comprehensive energy legislation by the fall.
European North Sea crude oil quotes as reported by Reuters: Forties for July 16-18 traded at dated BFOE minus 10 cents. Loadings for the nine main North Sea crude streams will average 2.357 mbpd in July, up from 2.072 mbpd in June, according to Reuters figures. Yesterday, complex margins for Brent in Rotterdam were down to around 52 cents a barrel, compared to an average of 94 cents over the last five days.
U.S. gasoline/distillate quotes as reported by Reuters: In Gulf Coast trading, prompt M2 was up at 8.75c under August. On distillates, prompt ULSD was down at 1.5c under, jet was at 0.5c under and heating oil was up a penny at 7c under. In New York Harbor, M2 was up at 4c under July. On distillates, ULSD was at 4.5c over July, jet was up at 5.5c over August and heating oil was up at 4c under.
