Goldman Warns Of Downside Risk To $50 Oil Forecast Due To Ceasefire With Niger Delta Avengers

In the aftermath of the successful Brexit referendum, many expected France, Italy, maybe Catalonia, and the Netherlands to demand a referendum next. Instead, the loudest call for a referendum over the weekend came from an odd source: the Niger Delta Avengers, who as we profiled recently, "hold the price of oil in their hands" by mothballing Nigerian production and exports for the past two months.

As All Africa adds,the group  which has been attacking Nigeria's oil infrastructure since early this year  urged President Muhammadu Buhari to call the vote, in a post on Twitter at the weekend. "It's probably not going to happen," says Ryan Cummings, a political analyst at Signal Risk. "The Niger Delta Avengers is not the first group to agitate for a seperate state in Nigeria. It's a common place used by other groups in the country, most notably Boko Haram itself."

The attacks have so far cut oil production by some 600,000 barrels a day. This, and the global oil prices remaining low, has sent Nigeria's economy into a tailspin. "[The government] should be concerned that they have a group that seems quite capable to strike targets in defiance of Nigeria's naval capabilities," says Chris Ngwodo, a security specialist of the region. "In my view, they should not be answering to the requests of this group, because doing so would be a signal that violence is a tool of political engagement and that would be disterous for the nation".

 

Abuja has offered to talk with the Avengers but the militant group has denied reports it has met government representatives. The group also this weekend called for Buhari to visit the Niger delta region.

That may not be the case. According to a new note just out of Goldman, a recent tentative ceasefire between the Nigerian government and the NDA has created upside risk to local production and ownside risk to Goldman's $50/bbl H2 price target. Here is Damien Courvalin with the details:

In a region with a history of violent interruptions, the oil infrastructure in the Niger Delta is suffering through another string of attacks by local militias. Mostly carried out by a group called the Niger Delta Avengers (NDA), these attacks likely reduced crude production by mid-June by 400 kb/d in addition to 200 kb/d of non-militia related disruptions. On June 20, the government announced a 30-day ceasefire with a number of militias including the NDA. And while the NDA commented that it “does not remember having [such] an agreement”, there have been no attacks since June 16 and on Monday June 27, the government announced that production had recovered by 200 kb/d to 300 kb/d. If sustainable, this ceasefire would pave the way for higher output, with the government optimistically aiming for a return to normal production by end-July. A normalization in production, even over several more months, would create downside risk to our $50/bbl 2H16 price forecast as it would bring the global oil market close to balance over that time period.

 

Admittedly, the path of future Nigerian production remains uncertain in the absence of a sustainable agreement and for now we cautiously continue to assume that production will be reduced by 350 kb/d in 2H16. Despite this uncertainty, it is noteworthy that the current geopolitical setup and the fiscal hit to the Nigerian government are quite similar to 2009 when the Nigerian authorities first put in place the amnesty and payments which stabilized the Delta and allowed for a sharp rise in production. With oil representing 60% of government revenues, this suggests that, while not necessarily imminent, a sustainable resolution to the current uprising is quite possible in coming months. Of course, the path to such a resolution may see further disruptions and should attacks resume and continue to target inland or shallow water fields connected to onshore terminals, we see the potential that at their peak, disruptions could reach 1.1 mb/d (vs. 0.6 mb/d in mid-June). Such a hit to production would create upside risk to our 2H16 price forecast, although the upside would continue to be limited by high global inventories and would likely accelerate a resolution of the current conflict.

 

Nigeria's disruptions have played an important role in helping end the global oil market oversupply in 2Q16

Oil production disruptions (thousand barrels per day)

Some background on the emergence of the Niger Delta Avengers:

Production stood at 1.8 mb/d in 2015, the year President Muhammadu Buhari succeeded President Jonathan by popular vote. Unlike President Jonathan, who was from the Niger Delta, President Buhari was born in the northern part of the country, and demonstrating his limited popularity in the Niger Delta, President Buhari received just 18% of the region’s vote. Making matters more difficult, President Buhari inherited a federal budget 65% funded by oil sales just as crude prices were declining. Blaming in part this decline in income, in May the government cut spending on the stipends and training programs offered to ex-militants by two-thirds, in line with the budget proposed last December. Also, in an effort to fight corruption, President Buhari ended the practice of hiring former Delta militants to guard oil infrastructure in the Delta.

 

These decisions led to the arrival of new militant groups in the region. The Niger Delta Avengers (NDA) emerged as the most destructive to oil production, disrupting supply out of Nigeria with dozens of attacks since February leading to a loss of 400 kb/d of production by our estimates with an additional 200 kb/d of disruptions driven by local theft and pipeline leaks (Exhibit 2). The group's demands are broad and include the departure of foreign IOCs from the Niger Delta, increased government spending on local infrastructure, and the local redistribution of oil rights. According to Stratfor, an intelligence company, the NDA’s attacks have been well-planned and were performed on strategic targets, which have resulted in a much more rapid decline in production than that in the late 2000’s.

 

President Buhari responded to these attacks by saying the militias would be defeated, and military raids in the Niger Delta recently began. This response reflects similar episodes in the past where militarization of the region has been the first line of defense against militia activity. But the Boko Haram insurgency in the north-east continues to stretch military resources, and the decline in oil prices has taken its toll on the Nigerian economy, with the economy falling into a recession. This, combined with the interruptions to oil production, will only serve to further constrain fiscal spending. In addition to increasing military pressure, the government, publicly led by the national petroleum minister Emmanuel Kachikwu, who is from the Niger Delta, pushed for negotiations (another similarity with the 2009 negotiations led by Jonathan, at the time Vice-President). The NDA initially refused to negotiate although on June 21 the government announced it had agreed to a 30-day ceasefire with a number of regional militias including the NDA. And while the NDA responded to the news with the comment that it “does not remember having [such] an agreement”, there have been no attacks since June 16 vs. a rate of one attack every couple days since early May. On June 27, in an interview Kachikwu stated that total oil production had recovered 200-300 kb/d from its lows. If the cease-fire holds, he expects production to return to pre-NDA levels by mid-July upon the repair of the Forcados pipeline although this may prove optimistic given that several oil majors have evacuated non-essential personnel from onshore Nigerian projects. 

 

The path of future Nigerian production remains uncertain in the absence of a sustainable agreement and for now we cautiously continue to assume that production will be reduced by 350 kb/d in 2H16. If sustainable, the current ceasefire clearly leaves risk to higher output and such a resumption in production would create downside risk to our $50/bbl 2H16 price forecast as it would bring the global oil market close to balance over that time period since we currently project a 2H16 average supply-demand deficit of 380 kb/d.

 

We continue to assume that Nigerian production will be curtailed by 350 kb/d in 2H16 although the recent ceasefire creates clear upside to production levels
Nigerian crude production disruptions (thousand barrels per day)

We find it ironic that the fate of the price of oil, and certainly Goldman's crude price target remains in the hands of a "terrorist" organization, which created its own website using GoDaddy on February 3, 2016, and which on June 5 moved to a .org domain using Cloudflare as registrar, a website that even has its own "Contact Us" section. Those readers curious just who is funding this group of millitants can simply ask them.