nil should only be used in place of an id, what we Java and C++ programmers would think of as a pointer to an object. Use NULL for non-object pointers.
Look at the declaration of that method:
- (void)observeValueForKeyPath:(NSString *)keyPath ofObject:(id)object
change:(NSDictionary *)change context:(void *)context
Context is a void * (ie a C-style pointer), so you’d definitely use NULL (which is sometimes declared as (void *)0) rather than nil (which is of type id).