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Crude Economics
Nigeria Erases Global Oil Glut

The global oil market is rebalancing a lot sooner than expected as supply disruptions have helped to erase a sizable and persistent glut that has seen crude prices fall more than $80 per barrel over the past 23 months before rebounding back up near $50 per barrel in trading today. The FT reports:

Militant threats to pipelines in Nigeria, a key Opec producer, are the latest fillip for an oil price that has also benefited from a booming gasoline market and rising demand in India…Anxiety over supply has also been fanned after Venezuelan president Nicolás Maduro on Friday announced plans to extend his government’s emergency powers — a reminder to investors of the deepening political instability in another oil producer.

Supply disruptions around the world are likely to average more than 3m barrels a day this month, with Nigerian output at its lowest level in decades.

Before these disruptions, the oil market was oversupplied by about 1.5 million barrels per day (mmbpd), so the goings on in Nigeria and the looming threat of a sharp drop in Venezuelan output as that country unravels are not only working to bring supply and demand back into balance, they could, as one Goldman Sachs analyst put it, push the market “into deficit in May.” Bloomberg reports:

A decline in production driven by unexpected supply disruptions, as well as sustained demand, have resulted in a “sudden halt” to the output surplus, Goldman analysts Damien Courvalin and Jeffrey Currie wrote in a report dated May 15. Other banks such as Morgan Stanley, Barclays Plc and Bank of America Corp. also noted that supply losses are leading markets to rebalance.

Fighting in Nigeria isn’t something analysts can prudently account for in market forecasts, but it does highlight how important the contributions of suppliers even as small as Nigeria—whose reserves make it OPEC’s eight most oil-rich member (out of twelve)—are to the overall market. If pipeline attacks there can offset a global oversupply and push crude back up towards $50 per barrel, imagine what might happen if, say, Saudi Arabia found itself drawn into a war in the Middle East that disrupted its 10+ mbpd output. Market forces seem to be stabilizing around a new price equilibrium in the $40-$50 range, but all of that can change quite quickly.

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