How Libya and Nigeria could provide a floor for oil prices

German oil firm Wintershall Holding AG's production facilities in the Libyan desert

AFP/Getty ImagesGerman oil firm Wintershall Holding AG’s production facilities in the Libyan desert

Saudi Arabia has long been a swing producer of oil, ready to take action to maintain a floor for prices. However, with the Kingdom showing no signs of intervening in the near term, Libya and Nigeria have emerged as nations that could alleviate recent downward pressure on prices.

Both countries posted large output gains during the summer, amid a backdrop of softening demand and accelerating North American production.

Helima Croft, head of commodity strategy at RBC Capital Markets, pointed out that the unanticipated return of Libyan exports was the initial catalyst for the downward move in oil.

She also noted that Libya and Nigeria contributed nearly one million additional barrels per day to the market over the three-month period.

“In both cases, production has increased in an environment where the overall security situation has deteriorated, seemingly placing them at risk for a sudden reversal in export volumes that could help lessen the burden on the other big producers to turn off the spigots,” Ms. Croft said in a report.

Despite the remarkable recovery in Libyan exports, the security situation has significantly worsened since the summer as regional leaders warn that the country is at risk of becoming a failed state.

“For now, though, oil has been spared from the rising unrest,” the strategist said, noting that the elected government has managed to keep control of oil infrastructure and oil accounts at the central bank. “How long they can maintain this advantage, however, is very much in question.”

Nigeria’s oil surge was primarily attributed to a decline in crude theft and force majeures by companies operating in the volatile Niger Delta. However, Ms. Croft warned that the oil region will likely become more difficult to control as national elections set for February 2015 approach.

“The Nigerian military, underfunded and overextended by the virulent Boko Haram insurgency in the north, will be hard pressed to deal with any uptick in election related unrest and criminal activities in the oil region,” she said. “In our view, the recent gains in output could quickly become a casualty of Nigeria’s looming game of thrones.”

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