Currently, a half a million barrels of crude oil are off production because of terrorist (militant) activity in Nigeria. This production is supposed to soon come back on-line in spite of the latest round of oil worker kidnappings.
The market seems less concerned about oil geopolitical risk. This optimism may be misplaced. (A good review on the supply and demand issues for crude oil can be found at the following site: http://www.eia.doe.gov/emeu/steo/pub/special/high-oil-price.html.)
Nigeria has not been the focus of many market commentaries on oil, yet the size of the Nigerian oil market is huge, over 2.5 million barrels of production a day. The strategic importance of Nigerian oil to the United States is also significant. Africa now presents 19% of oil imports, up from 14% a few years ago. Nigeria, at over 1 million barrels a day, is the fifth largest oil importer to the US.
The Nigerian problems are much greater than an increase in the kidnapping of oil workers. The government is a kleptocracy where “officials” have taken oil profits for personal gain and not for distribution to the people. There is a growing rebel movement by MEND (Movement for the Emancipation of the Nigerian Delta) of assassination, hostage taking, and confrontation with the government and oil companies. These rebels think there is nothing to lose from escalation and confrontation. The danger is also greater because much of the oil production is close to the population unlike the Middle East.
This trouble area can have significant ramifications for the price of oil in the next year. The potential for having dramatic impact on oil is significant for two reasons. One, already mentioned, it produces a significant amount of oil and two, the level of awareness of the problem is much smaller than is the case with the Middle East where there has a more focus. The potential for surprise with size is a toxic mix for markets. Any complacency concerning supply risk is unwarranted
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