A Strong Bullish Catalyst For Oil

| About: The United (USO)

Summary

Oil prices have taken a beating over the past couple of days, driven by OPEC and US oil production fears.

Despite these concerns, however, one piece of news came out over the weekend that I don't believe the market it taking into consideration.

A militant group called the Niger Delta Avengers has come out, promising more attacks on oil facilities after the Nigerian government failed to properly negotiate with them.

If the past is indicative of the future, this move could result in hundreds of thousands of barrels of oil per day coming offline, which would be bullish for oil.

January 9th and 10th were bad days for the oil market, including investors in companies like Whiting Petroleum (NYSE:WLL), Chesapeake Energy Corp. (NYSE:CHK), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs. The reason being that, in addition to uncertainty regarding OPEC and non-OPEC output, markets are afraid of the prospect of rising US production. In my view, however, some good news arose over the past couple of days that should actually strengthen the bull case for long-oriented investors that I will dig into below.

An observation of the Niger Delta Avengers

Over the past several months, I've written a few pieces on the Niger Delta Avengers and their efforts to stop oil production in the Niger Delta region of Nigeria as a lash back against the government for what they perceived as the nation taking advantage of its people. While I said that I do not condone the destruction of property, I applauded the fact that they did not wish to cause any bodily harm to individuals (though they later indicated that they were considering such action).

The last time I wrote about the group was in an article published on Seeking Alpha on November 17th, wherein I discussed a statement from the organization in which they said they had struck against three oil transportation systems after the Nigerian government was not, in the Avengers' view, taking negotiations with militants in the region seriously. I claimed that this was a bullish catalyst for investors because of the fact that the group had been instrumental in bringing oil production down in the nation (with the help of other militant groups, of course). In August of 2016, for instance, oil production had dropped to an average of 1.419 million barrels per day, down from an annual average in 2015 of 1.865 million barrels per day in 2015 and 1.953 million barrels per day in 2014.

After the government agreed to hear militants out, listening to their demands, the Avengers and other groups in the region decided to initiate a cessation of hostilities (though not every group was like this). As a result, oil production in Nigeria soared back up to 1.692 million barrels per day by November of last year and, because they are exempt from the OPEC and non-OPEC joint cut, alongside Libya and, to an extent, Iran, the fear is that higher output could undermine the efforts of the producers that are cutting.

Because of their November 15th announcement regarding their three strikes to the region, I believed that it was likely that oil output in Nigeria might fall again but then something unexpected happened; silence. This was further magnified when, on December 16th, news broke that the Nigerian government had captured at least two people (and were questioning another three) who the government claimed admitted to being leaders of the Avengers. After that, more silence.

How about now?

For weeks, I thought the Avengers were finished and I almost, last week, wrote an obituary-type article on Seeking Alpha postulating that to be the case. Thankfully, I got busy and was unable to find the time to write such an article and this is a positive because I would have been wrong. This is because, on January 6th, the group, on their website, announced that they were commencing operations again.

According to their site, they intend to launch two new offensives called Operation Walls of Jericho and Operation Hurricane Joshua in order to "reclaim" their "motherland". The objective here is to "dislodge all cleavages the Nigerian Ruling oligarchy has foisted on the region that is sustaining the ongoing primitive accumulation by dispossession". In the image below, you can see some of their other thoughts regarding how displeased their organization is with the Nigerian government.

*Taken from the Avengers' Website

What these operations consist of is anybody's guess. The Avengers stated that they intend on keeping these moves a secret but they guarantee that what they do will hit their "enemy very hard". My guess is that this will consist of a large-scale strategy to disrupt the flow of oil by means of blowing up additional pipelines and, if this is true, the impact should prove bullish for investors like myself who are long on oil-related companies.

Takeaway

Right now, the picture facing Nigeria is fairly unappealing. Even though energy prices continue to rise (though we are seeing a modest pullback), any drop in oil production driven by militant activities will almost certainly more than offset the benefit of those higher prices. That said, for anybody long-oriented in the oil patch who is not directly exposed to Nigeria, the picture is bullish if the Avengers do pull through on their tactics.

Disclosure: I am/we are long WLL, LGCY, AREX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may end up buying shares of CHK at some point. I currently own shares of LGCYO and LGCY.

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