Oil jumped above $70 a barrel as Nigerian rebels attacked a Royal Dutch Shell facility. It is one of a number of such incidents in a nation that is the 12th largest supplier of crude in the world.
The biggest risk that the price of oil will rise over the rest of the year may not be supply or demand driven by factors like OPEC decisions or the rebound of the Chinese economy.
Oil futures have probably already factored in a reduced supply of crude from OPEC nations and dropping exploration and production programs from the world’s largest oil companies. Many of them cut their budgets when the price of oil was low late last year and in the first quarter of 2009.
Oil traders have also almost certainly anticipated a recovery in demand based on the global recession ending or at least slowing by the end of this year. The IMF and World Bank have started to revise their forecasts for improving financial conditions upward. Some experts believe that China’s GDP growth will jump back above 7% for 2009.
The risk of political unrest in several of the largest oil-producing nations is fairly high. Jane’s, a company that tracks global risk, lists Venezuela, Iran, and Iraq along with Nigeria as countries that face significant chances of political instability. All are among the 15 largest oil producers in the world and Iran is the fourth largest producer.
Supply interruption based on government and military catastrophes is almost impossible to predict. That means that supply interruptions cannot be anticipated and their effects cannot be readily measured.
The global oil markets hate uncertainty. They often react to situations like the one in Nigeria by trading crude up quickly and analyzing the situation later.
One large interruption in supply could certainly take crude prices to their highest levels in 2009.
Douglas A. McIntrye
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