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Royal Dutch Shell (RDS.A): Declaration of Force Majeure; Crude Price Rally Underway?

Screen Shot 2016-08-14 at 11.56.06With the recent shutdown of pipeline owned by the energy giant in Nigeria coupled with the pipeline outages and militants attacks, we forecast a crude price rally

By Staff Writer on Aug 14, 2016 at 6:34 am EST

Following a string of attacks on its oil facilities combined with pipeline outages in Nigeria, Royal Dutch Shell (ADR) (NYSE:RDS.A) has finally declared a force majeure on Bonny Light crude oil. Citing statement by the company on Friday, Reuters reported that the Nembe Creek Trunk Line (NCTL) was shut down after a leakage by Aiteo, the pipeline’s operator. Aiteo was unavailable to comment on the matter.

Natasha Obank, spokesperson for the company stated: “The pipeline has been shut down for a joint investigation visit into the cause of the leak and repairs.”

The latest declaration comes just a month after the oil major put a halt to its recently declared force majeure on Bonny Light crude. After being taken offline in early May due to continuous outages, the pipeline resumed to go on stream, however, is again in doldrums. Capable of producing around 200,000 barrels per day, the pipeline serves as a significant artery that supplies oil produced in the Niger Delta to the coast. Only last week, the pipeline resumed operations with plans of 211,000 barrels per day of crude exports for August.

Currently, the largest export crude grade Qua Iboe along with Forcados and Brass River are under force majeure. With Bonny Light ranging as the third one, a trading source informed Reuters that other streams of different grades like the Escravos have also lowered their pace.

The latest force majeure comes as the latest blow to the already hampered Nigerian oil sector. Stricken with poverty and neglect, the militants and residents have long demanded an exit of foreign oil giants from the Delta region. Not just Shell, but pipelines owned and operated by Eni SpA (ADR) (NYSE:E) and Chevron Corporation (NYSE:CVX) have also been persistently attacked by the armed gang of youths.

Struggling for independence, the Niger Delta Avengers have long complained of the unfair distribution of oil wealth by the energy giants. Although the government of Nigeria has started discussions and negotiations with the militants over provision of training and monetary benefits, the NDA are reluctant to join in the talks unless International Energy Agency acts as mediator.

Despite the recent resumption in monetary payments, attacks continue to rock the foreign oil giants operating along the southern Delta. Oil production of Nigeria stands behind 700,000 barrels of crude per day and is well behind that of Angola. Due to adversely impacted exports and crude production, the economy continues to be in a distressed state.

Bidness Etc believes that the militants are unlikely to put the situation to rest until their demand of an exit by oil giant is fulfilled. Therefore, foreign oil giants such as Shell, Exxon Mobil Corporation (NYSE:XOM) shall seriously consider an exit from the region else they would run out of oil in storage to keep up with crude deliveries.

We also believe that the attacks and pipeline outages followed by force majeure will contribute positively to the oil market. Dominated by excessive supply and weak demand, the oil prices have crashed below $50 per barrel peaking from $115 per barrel in mid-2014 when the oil downturn first began. It is of notable significance that two months of pipeline outages in Nigeria in the second quarter contributed to crude price rally. Therefore, this time too it is likely that with the latest pipeline outage, supply of crude in the global oil market will be hampered thus, reflecting in the easing of market rout. Currently, the West Texas Intermediate is trading up 2.3% at $44.49 per barrel, while the Brent crude is up 2.02% at $46.97 per barrel.

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