11 October 2015, Lagos – As the present administration grapples with the issue of dwindling revenue largely worsened by the persistent slide in the global oil price, Festus Akanbi x-rays some of the emerging scenarios that will shape the oil market in the near term and how these affect Nigeria
In Nigeria, like in other oil producing nations, the month of October is significant in the history of crude oil pricing and sale in many respects.
With the submission of President Muhammadu Buhari’s cabinet list to the Senate for approval, it is crystal clear that the new administration is due to unveil its economic policies in days ahead. It is also expected of the new administration to begin a robust policy of hedging the economy against the persistent oil price slide which has not only posed serious issues to the 2015 budget but has also raised fears over next year’s budget.
The problem of erosion of revenue caused by the global slump in oil prices, according to World Bank, has underscored the need for Nigeria and other oil-dependent nations to fashion out ways of meeting the challenges.
“The dramatic, on-going drop in commodity prices has put pressure on rising fiscal deficits, adding to the challenge in countries with depleted policy buffers,” says Punam Chuhan-Pole, Acting Chief Economist, World Bank Africa. “To withstand new shocks, governments in the region should improve the efficiency of public expenditures, such as prioritizing key investments, and strengthening tax administration to create fiscal space in their budgets.”
Although, the complexity of the emergent situation and the severity of oil crisis have cast doubts on the ability of the current administration to run this year’s budget without borrowing, highly placed sources in the oil sector said what appears to be the loss of confidence and revenue by Nigeria via the oil price debacle is about to be reversed as events in the global oil market accentuate the rising positive sentiments over higher oil price scenario.
Prospect of Price Recovery
Industry watchers said the prospect of a higher oil price and the corresponding prospect of higher revenue to Nigeria is being fuelled by the sentiments in Saudi Arabia and the tension in Syria, which they said have the potency of sustaining the prevailing panic over oil supply to the international market.
For instance, Saudi Arabia, the highest oil producer is faced with the choice of risking the dynasty’s survival by maintaining its proxy oil price war, or cutting output to force up the cost of a barrel. Analysts said the Saudi regime is more likely to back down.
The sentiment among some market watchers is that give or take, there are signs that oil producing nations like Nigeria may soon heave a sigh of relief as a result of a combination of rising demand and the fall in the number of shale oil drilling rigs in the US.
An online publication, Fortune reported last week that crude oil prices hit their highest level in three months in response to growing signs that Saudi Arabia is winning its war on U.S. shale producers. According to the report, a raft of data in recent days has suggested that the period of heavy oversupply in the global crude market is coming to an end, as shale producers run out of cash for drilling, and low prices encourage higher demand around the world.
Futures prices for West Texas Intermediate, the US benchmark blend, topped $49.50 a barrel for the first time since July in overnight trading although they have retreated a little ahead of a closely-watched release on US oil stocks last Wednesday. The global benchmark Brent, meanwhile, topped $53/barrel for the first time since the end of August. Both are now up some 8% from their levels of a week ago.
Shale Oil Factor
The publication reported that Baker Hughes’ closely-watched rig count showed that the number of drilling rigs in the US turned down sharply in September after signs of a brief revival in the previous two months, adding that at 848, the number of US drilling rigs is only half what it was in January, and the lowest level since 2003. The Department of Energy said last week it estimated US oil production fell by 120,000 barrels a day last month, and will continue to fall through mid-2016. It now expects US crude output to fall to an average of 8.9 million b/d next year from 9.2 million this year.
But rising demand is also helping to rebalance the market. The International Energy Agency now expects global demand to rise by 1.7 million b/d this year. Reuters quoted Patrick Pouyanné, the chief executive of French major Total SA TOT 2.75 per cent, as telling a conference Tuesday that the increase could be even bigger.
What this means is that Nigeria still has the hope of reaping meaningfully from its oil sale provided the emerging scenarios are positive although the new administration has expressed the determination to promote non-oil sectors of the economy as a buffer.
President Muhammadu Buhari recently disclosed that the 2016 national budget being prepared by his administration would include fresh policies and measures to encourage the rapid diversification of the Nigerian economy away from its current over-dependence on the oil and gas sector.
The Syrian Crisis and Iran’s Fate
Secondly, Russia’s physical presence in Syria adds to tensions already reaching boiling point in a region that provides about a fifth of the world’s oil supply and a sizeable portion of its natural gas. Although political risk is currently not reflected in oil prices hovering below $50 per barrel, this could now change as Mr Putin seeks to establish a strategic foothold in the region.
However, as permutations among oil producing nations continued at the weekend, fears were also raised that the prospect of Iran being left of the hook by the international coalition could make nonsense of the expectation of a higher oil price in the immediate future.
Iran has faced sanctions for decades, but those implemented in 2012 have taken a severe toll on the Iranian economy. Market watchers are of the opinion that even if sanctions are lifted, it’s likely the global oil market will remain flooded late into next year, keeping prices low and employees out of work.
In November 2013, Iran signed an interim agreement with China, France, Germany, Russia, the United Kingdom and the United States that provided some sanctions relief. The agreement, known as the Joint Plan of Action, allowed Iran access to $4.2 billion in previously frozen assets in exchange for limiting nuclear production and permitting international inspectors more access to sites.
Iran’s crude oil exports are capped at 1.1 million barrels per day, less than half its 2011 export level. Meanwhile, international sanctions have taken a severe toll on the Iranian economy. In April, US Treasury Secretary Jacob Lew estimated that Iran’s economy was 15 per cent to 20 per cent smaller than it would have been had sanctions not been imposed. He projected it lost $160 billion in oil revenue alone. In addition, more than $100 billion in Iranian assets have been held in restricted accounts outside the country.
In January, then-Undersecretary of the Treasury David Cohen outlined the US sanctions in congressional testimony. “Our sanctions have drastically driven down Iran’s oil exports,” Cohen said. “In 2012, Iran was exporting approximately 2.5 million barrels of oil a day to some 20 countries; today, it exports only around 1.1 million barrels, and only to six countries.” He estimates 300,000 – 500,000 new barrels of oil to be on the market within six to 12 months after a deal is signed. Sanctions relief will permit new business with Iran, but uncertainty over Iranian compliance and US politics will deter long-term deals for the next 18 months, he said.
Some have predicted Iran oil exports could reach as high as 1 million barrels per day. It’s hard to predict.
“It looks like the agreement has a good shot of being signed now – so sanctions will be released as I understand it sometime in first quarter of next year,” said Pete Stark, senior research director at IHS in Englewood. “And at that time and probably even before then, I’m sure Iran will cheat, there’s going to be some looseness in the system. But Iran, we feel, some people say will produce 1 million barrels a day – but … we feel like Iran could add 600,000 barrels a day. Over six to nine months we’ll probably have a good slug coming on.”
The World Bank predicted in early August, Iran will add 1 million barrels, lowering oil prices by $10 a barrel in 2016.
Crude has stuck near $45 a barrel for more than four weeks after plunging to a six-year low in August even as U.S. crude stockpiles stay about 100 million barrels above the five-year seasonal average and OPEC pumps above its output target.
It is therefore expected of the President Buhari’s team to take advantage of all the possibilities in the on-going international politics on oil price. While attention would be focused on the development of non-oil sector, the administration must not lose sight of the opportunity inherent in the international efforts to manage the issue of global oil crisis.