From Nick Cunningham: OPEC provide a shot in the arm for oil prices this week when S&P Global Platts reported a much higher than expected compliance rate for the month of June. So far, OPEC has achieved 91 percent of its promised production cuts, impressing many oil watchers who expected mutual antipathy and mistrust to get in the way of cooperation.

But the success of the deal could be undermined by a few members within OPEC that are not part of the deal. Libya and Nigeria were given exemptions, due to the sizable portion of oil production capacity sidelined because of war, sabotage and political strife in both countries.

There are still very large question marks over the stability of these two countries, but it is not impossible that some of the obstacles start to clear and more production comes back online. Libya produced just under 700,000 bpd in January, a remarkable rebound from the recent past. That figure is up about 500,000 bpd from its lowest point last year, while up more than 100,000 bpd since the OPEC deal was announced. The more Libya raises output the more it will offset some of the punch packed by the OPEC deal.

Libya is targeting production of 900,000 bpd by the end of the year, a feat that will be difficult to achieve but not out of the realm of possibility. To help its cause, a major oil export terminal was brought online a few weeks ago. Nevertheless, political instability and rival factions fighting for power in different parts of the country, combined with the threat of ISIS, all stand in the way of Libya’s objective.

Nigeria has had much less success in recent months. S&P Global Platts puts Nigeria’s January production at just 1.65 mb/d, roughly flat compared to 2016 levels and down sharply from 2015. In fact, 2016 was a horrific year for Nigeria. While the country has long suffered from theft, sabotage, and a growing internal security threat from a variety of militant groups in both the north and in the Niger Delta, 2016 proved to be a low point, at least from the oil sector’s point of view. The surprisingly successful campaign of attacks from the Niger Delta Avengers took Nigerian oil production from over 2 mb/d at its highest point in 2015 down to 1.4 mb/d last summer, the lowest production level in thirty years.

Attacks hit the industry on multiple fronts, destroying platforms, pipelines and export terminals. Just as Libya feels optimistic about its ability to ramp up production and exports because it brought a major terminal back online, one of the keys to Nigeria’s success will be the Forcados export terminal, Nigeria’s third largest. Forcados, which has an export capacity of over 200,000 bpd, was offline for most of last year because of multiple attacks. Nigeria’s oil minister repeatedly predicted its imminent restart in 2016, but to no avail. There is currently no timeline for when it might be brought back online.

Nigeria has roughly 500,000 bpd offline because of security issues, Manji Cheto, senior vice president for West Africa at Teneo Intelligence, told Bloomberg.

To be sure, it would be foolish to think this capacity could come back online quickly or easily. But the government is making a concerted effort to reduce attacks, reversing its decision to scrap years of supporting the “amnesty” program for militants, in which former militants are paid a stipend to essentially remain peaceful. The surge in attacks last year came as President Muhammadu Buhari suspended the program. Reeling from the wave of attacks, the President called for restoring funding for amnesty in an effort to bring back a semblance of peace.

It is a little early, but this could breathe a bit of life into Nigeria’s struggling oil sector. “The government is already engaging the Niger delta inhabitants towards creating an enabling environment for us to drive our production back up,” Wale Tinubu, CEO of Oando Plc, a small Nigerian energy company, told Bloomberg. “I know for a fact we’re going to get an improvement.”

So, we have Libya hoping to bring back at least 200,000 bpd on top of the almost 200,000 bpd it added since OPEC announced its deal in November. Then there is some 0.5 mb/d that Nigeria has sitting offline, and while it would probably be overly ambitious for it to restore all of that output anytime soon, the government is determined to restore some of it.

All eyes are on OPEC cuts, but new supply could be coming from more than a handful of sources in 2017, and Libya and Nigeria are just two of the countries hoping to add production this year. In a sign that there is waning confidence in the six-month OPEC deal, the oil ministers from Iran and Qatar recently hinted that the deal might need to be extended through the end of the year for the oil market to balance.

The United States Oil Fund LP ETF (NYSE:USO) rose $0.09 (+0.8%) in premarket trading Thursday. Year-to-date, USO has declined -3.33%, versus a 2.67% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #51 of 121 ETFs in the Commodity ETFs category.

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