Mexico pipeline attacks raise fear of new Nigeria

A shadowy leftist rebel group has claimed two coordinated bomb attacks on Mexican pipelines since July. The most recent this week knocked out a quarter of the country's natural gas along with a large crude oil line.

So far, energy shipments from Mexico, the world's fifth largest oil exporter, have not suffered from the attacks, and strife in Nigeria has been much worse. Still, analysts say rising instability in Mexico, a normally reliable supplier, could add as much as $10 a barrel to world oil prices.

We could easily see a risk premium of $5 to $10 added to the price of oil because of this, on top of the roughly $5 premium due to instability in Nigeria, said Addison Armstrong, analyst at TFS Energy Futures.

These kinds of coordinated bombing attacks against significant energy infrastructure continue in Mexico and it is not a stretch to say the oil market is very concerned about reliability in this large U.S. supplier.

U.S. oil prices closed at a record high over $78 a barrel on Tuesday on rising concerns over supply, even as OPEC producer nations agreed in Vienna to increase output by 500,000 barrels per day.

Violence in big oil producer nations in the Middle East, Africa and Latin America has helped drive red-hot oil markets. Nigeria has been among the most dramatic examples, with armed militants on power boats routinely disrupting production in the energy-rich Niger Delta.

This week's attacks on Mexico's fuel pipelines, which had the knock-on effect of shutting 60 percent of the country's steel production and idling its Volkswagen plant, came despite heightened security around oil infrastructure after July's bombings.

If it gets worse, it would likely have a more significant impact on the global markets, said Adam Sieminski, chief energy economist at Deutsche Bank AG.

The Mexican government will need to get better at protecting their infrastructure, like the Saudis, or get faster at fixing it, like the Colombians.

Saudi Arabia has foiled a handful of attacks on its oil facilities in recent years, while Colombia -- once an important source of oil to the United States -- has faced repeated bombings of its pipelines alongside declining production from its fields.

The leftist rebel group that claimed responsibility for the Mexican attacks, the Popular Revolutionary Army or EPR, claimed 500 members across Mexico when it burst into public view in 1996. But the group had been relative quiet in recent years.

While energy experts agreed the sequence of attacks on pipelines in Mexico could raise oil prices, some said Mexico's energy supply is a long way from becoming as unreliable as Nigeria's.

It doesn't seem that the problems Mexico has are as entrenched as those in the Niger Delta, said Sieminski. The political situation in Mexico doesn't seem as dire as what the Nigerians have faced.

I can imagine Mexican supply becoming more unreliable, but I assign a low probability to that scenario, said Tim Evans, analyst at Citigroup Futures research.

Nigeria has far more difficult complicated politics. They have more than 200 tribal groups and languages. They have major religious differences that make governing difficult. They have a history of military coups to establish civil order followed by fresh attempts at democracy. It is a different context. There are more differences than similarities.