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Monday, September 27, 2004

THREAT OR NO THREAT, PRICES PUSH SKYWARD

NYMEX futures prices hit a record $50 per barrel in after hours trading today. Prices were propelled primarily by news out of Nigeria that Shell had decided to discontinue use of some barge transport routes in the Niger Delta because of fighting between the government and Niger Delta People's Volunteer Force (NDPV). Although the $50 mark has never been surpassed, prices are still far off in real terms what they were during the 1979-80 oil crisis.

Shell estimates that 30,000 to 40,000 bbl/d are lost as the result of the transport restrictions, but it has no plans at this point to curtail any further production. The company also said it was on track for its September exports of Nigerian Bonny Light, which constitutes the primary crude coming out of Shell's affected eastern division -and a crude which continues to be in particularly high demand in the fuel hungry market.

It is likely that these production losses are accounted for in the 5% export reductions that Shell already suggested had resulted from this year's violence in the Niger Delta. Traders confirmed today that no cargoes out of Nigeria had been cancelled as the result of further cutbacks. However, in this jittery oil market, any news is bad news, even yesterdays news warmed over.

In a further development, Mujahid Dokubo-Asari, head of the rebel forces, announced today that his group had decided not to attack Nigeria oil export infrastructure, but instead to target employees of Agip, a unit of Italian oil major ENI. Dokubo-Asari claims that Agip has loaned the government helicopters, which the government has used to attack rebel positions during its crackdown on the militant group in the past several weeks. The company denies the report. Agip produces around 200,000 bbl/d in the region.

Although the threats against Agip personnel seem to ratchet up the intensity of the threat in Nigeria, the switch in tactics may actually be a sign of weakness on the part of the NDPV. It is important to rebel that the conflict began not between the government and the rebels, but rather between rival rebel gangs, who were in conflict over revenues from stolen or "bunkered" oil. The NDPV, apparently, has decided that attacking the oil facilities themselves would undermine its ultimate goal of increasing its revenues from pilfered oil.

While a large scale disruption thus does not seem likely, upward pressure on prices is likely to continue until some more final resolution to the situation seems clear.

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