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Will Supply Disruptions Actually Dent The


Global Oil Glut?

By Ellen R. Wald, Ph.D. | May 17, 2016 06:30AM ET


The big question this week is whether supply disruptions will make a dent in the oil markets ever-present global supply glut.
The answers in a nutshell: disruptions in Nigeria, Canada, and Libya are likely transient, whereas Venezuelan production
poses a long-term problem. U.S. production will continue its slow decline, even if oil prices reach $50. On the other side,
Iranian production will continue to increaseslowlyand Saudi Arabia will increase production rapidly. As for where the price
of oil is headed your guess is as good as mine.

Nigeria

The Nigerian National Petroleum Company generally produces about 2.5 mbpd, making it Africas largest oil producer.
However, recent acts of terrorism and sabotage have cut this number to 1.65 mbpd. Both Shell (NYSE: RDSa ) and Chevron
(NYSE: CVX ) have suspended oil production in areas affected by this activity.
Insurgencies targeting Nigerias oil production are not a new phenomenon. In fact, Nigerias previous president, Jonathan
Goodluck, pioneered a program in 2009 that provided former oil terrorists in the Niger Delta region with monthly stipends to
keep them from attacking oil facilities. This seemed to keep a lid on violence in the region. Nigerias new president,
Muhammadu Buhair, recently reduced the programs funding by 70% and would like to cancel it entirely within two years.
The Niger Delta Avengers (who perpetrated the most recent attack on an offshore oil platform) claim to be fighting for
independence for the Niger Delta and also demand a larger share of oil profits. If Nigeria can clamp down on this latest wave
of attacks (which it appears to be doing in a recent series of arrests) and placate the militant separatists, then the country
should be able to recover production in the short-term. The fact that the issues are political rather than structural suggests that
oil investment and production should not suffer for long.
In fact, Exxon (NYSE: XOM ) just announced plans to ramp up Nigeria crude production this week.

Canada

Wildfires in the Alberta tar sands region caused about a 1 mbpd drop in Canadian oil production over the past two weeks. The
EIA expects some delays and outages throughout the summer, but the EIA does expect production to recover by the fall.
However, other sources say that Canadian production will recover much sooner, likely by the end of May. This is one reason
to doubt the usefulness of the recent Goldman Sachs forecast, which cites supply disruptions in Canada as a significant factor
in resolving the global oil glut.

Libya

Production from Libya should be at about 1.5 mbpd, but attacks from Islamic militants and violent factional fighting throughout
the country have caused significant disruptions (on the scale of 75%) to that supply. In particular, a political rift has grown and
caused a short-term UN embargo when a faction in eastern Libya tried to illegally export oil outside of the Libyan National Oil
Corporation. The UN blockaded oil from the eastern groups port, resulting in additional supply disruptions over the past two

weeks. However, the blockade has since been partially lifted and the two factions appear to be moving towards a compromise.
Only 150,000 bpd remain embargoed. (This is a miniscule amount, compared to the nearly 100 million bpd consumed
globally). According to the IEA, once the remaining ports are reopened, Libyan production could immediately grow by 700,000
bpd.

Venezuela

In 2015, Venezuela produced about 2.78 mbpd of oil. The countrys economic woes, including significant outages in electricity
production (Venezuela largely relies on hydroelectric for domestic power, not oil) have stunted its oil production by at least
188,000 bpd. The dire economic situation in Venezuela promises to exacerbate and prolong their production failures. There is
no guessing how low Venezuelas production levels may get in the coming months due to extreme austerity and economic and
political upheaval.
Of all the supply disruptions addressed here, Venezuelas will have the most significant impact on the market, because the
problems facing its oil production are structural and have been brewing for many years. Other than securing a temporary
bandage via an oil for loans deal with China for about $50 billion, the Maduro government does not seem to have any plans
to alleviate the situation. Right now, estimates indicate Venezuela would need sustained prices of $80 per barrel just to get
production back up to 2015 levels. Until Venezuela improves its production capacity, it cannot bring in the revenue it needs;
and Venezuela cannot improve its production capacity until it brings in more revenue.

Iran

Iranian oil production appears to be up at 4 mbpd, but political issues have stymied the release of new terms for its foreign oil
contracts. Since the New Year, Iran has increased its oil delivery contracts, signing new ones with ENI (NYSE: E ), Total
(NYSE: TOT ) and South Korea. Iran hopes these contracts will lead to investment in Irans aging oil industry. As of yet, only
the Chinese have been willing to return to Iranian oil development at pre-sanction oil contract terms. However, the latest news
is that Iran will have its foreign oil contracts ready in June or perhaps July.

Saudi Arabia

Despite recent changes in the Saudi oil ministry, there are few questions about the worlds largest oil producers intentions. Oil
production in Saudi Arabia is set to rise. Production in Saudi Arabia generally grows during the summer months to
accommodate increased domestic electricity demands, but this planned expansion is more long-lasting. Citing growing
demand from India and China, Aramco is planning to bring additional capacity online from its Shaybah field shortly and from its
Khurais field in 2018. Shaybah alone will bring an additional 1 mbpd to the market.
United States
American oil production continues to slowly decline as additional shale oil companies file for bankruptcy. Since 2016, about 69
oil and gas producers in North America have filed for bankruptcy protection. Despite the recent rise in the price of oil, the
financial troubles continue. Fourteen oil companies have filed for bankruptcy since April, some with debt in the billions of
dollars. Even with oil prices edging towards $50 (a price which may not be sustained), more firms are likely to file, leading to
further decreases in production and the continued slow process of consolidation.

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