Portfolio | Recent oil supply outages push equilibrium further down the road

At the beginning of May, this column said that crude looked tentative on its new perch in the mid-US$40s per barrel because market fundamentals remained weak. In the weeks that followed, both Brent as well as NYMEX crude in the US rose further, to flirt with the psychologically important US$50 per barrel level.

As much as that raises the hopes of beleaguered producers around the world and enabled Opec to feign unity and a sense of purpose without an ideology at its June 2 meeting in Vienna, the latest strength in oil prices cannot be taken for granted. It could sustain for several weeks, without doubt, depending on how long the drop in production in Canada, Venezuela, Nigeria, Iraq and Libya lasts, but it would be risky to assume this is the oil market’s new normal.

A knee-jerk bullish response to the rash of outages in recent weeks – estimated to have removed close to 3 million barrels a day of oil supply from the global market – is understandable for those looking at crude futures from a day-to-day or intra-day perspective. But the outages are all different in nature and by definition are going to vary in duration. That means the interrupted supply is returning gradually to the market, even if at an uncertain pace.

The wildfires that knocked out about 1.27 million barrels a day, or a third of Canadian crude production from May 1, have been gradually moving east, with companies in the western oil sands province of Alberta starting to resume production around the end of May and early June.

Nigerian output, which declined by around 800,000 barrels a day as a result of renewed militancy in the oil-rich Niger delta, is expected to ramp up to its 2.2 million barrels a day full potential by the end of August, oil minister Emmanuel Kachikwu said on June 2.

In Iraq, power supply interruptions affected 50,000 to 70,000 barrels a day of flows from the country’s south, with the Kirkuk field in the north pumping about 170,000 barrels a day less. But variations of 100,000 to 200,000 barrels a day in Iraqi output, which overall has risen to 4.5 million, are routine. Besides, the producer was due to make up the estimated 164,000 barrels a day drop in May exports versus April by loading additional volumes in June.

Libya had shored up crude output to around 300,000 barrels a day by the end of May from a trough below 200,000 earlier in the month. The North African producer, which remains in the grip of political uncertainty with two rival governments claiming legitimacy, now hopes to boost production to 700,000 by the end of this year. The likelihood of that happening appears the same as output languishing at current levels, due to political instability or ISIS capturing oil facilities in Libya.