06 March 2016, Lagos — President Muhammadu Buhari’s just-concluded diplomatic shuttle to Saudi Arabia and Qatar, which was preceded by his attendance at this year’s World Future Energy Summit in Abu Dhabi, United Arab Emirates (UAE) and the rapprochement between Saudi Arabia and Russia may be hints of oil price rebound at the international market.
With the conclusion of President Muhammadu Buhari ‘s official visits to Saudi Arabia and Qatar, two important members of the Organisation of Petroleum Exporting Countries (OPEC) amidst the turbulence at the international oil market, which has seen Nigeria’s foreign earnings standing at a low ebb, indications are rife that the discussions would result in a rebound of oil prices at the global market.
The visits to the gulf countries came on the heels of a similar one by Nigeria’s Minister of State for Petroleum Resources and Group Managing Director of Nigerian National Petroleum Company(NNPC), Dr. Emmanuel Kachikwu, to Abu Dhabi, United Arab Emirates, leading observers to suggest that the country may be rallying influential members of the oil cartel to agree to cut oil supply to the market as a way to shore up the prices of crude. According to international media, Nigeria had been pushing for an emergency meeting of the OPEC while four Gulf states, Saudi Arabia, Qatar, Kuwait and the United Arab Emirates did not support.
The reasoning in the direction is not far-fetched. The slump in oil prices has so badly affected the country’s revenue and continues to hurt its economy as evidenced in depleting foreign reserves and attendant forex crisis. It has also shown in the way the naira has plummeted in value especially against the United States Dollar leading to the debate whether to devalue the naira or not. Real sector operators believe all of these have created an unfriendly environment for business resulting in shutting down of businesses and loss of jobs.
Before the Visits
In announcing Buhari’s trip to Saudi Arabia and Qatar, a statement from the Presidency penultimate Sunday noted that the Gulf visits will focus on ending the global slump in oil prices. The statement had added that, “ongoing efforts by Nigeria and other members of the Organisation of Petroleum Exporting Countries (OPEC) to achieve greater stability in the price of oil exports are expected to be high on the agenda of discussions between President Buhari and the Saudi monarch,” a statement read.
Though Nigeria does not rank among top five largest exporters of oil, its position as Africa’s largest oil exporter and its international clout in the comity of nations coupled with the current state of its economy like many other oil-producing nations, observers argue, could explain the need for the trip to rally support for moves that may lead to oil price rebound.
The Need for OPEC, Russia to Cooperate
As prices of oil continue to slide, some analysts believe that to check the slide, both OPEC and non-OPEC members, particularly Russia, need to meet and agree to cut oil supplies to the market to shore up prices. Even then, others held, agreeing to cut supply may just be one leg of the strategy arguing that Iran and Iraq as well as the availability of shale oil and China’s readiness to purchase either crude or shale oil also matter in the equation.
According to Vice-President of Lukoil, Russia’s second largest oil company, Leonid Fedun, Russia needs to start working with OPEC to cut oil supplies to the world market to support prices. Fedun was quoted in the international media saying “In my opinion, if such a political decision is taken, Russia should jointly work with OPEC to cut supply to the market. It’s better to sell one barrel of oil at $50 than two barrels at $30”, Fedun said.
Before now, OPEC and Russia, the world’s top oil producers, have refused to cooperate to help buoy global oil prices as they were defending their market share from each other. As a result, Brent has fallen to around $35 per barrel in recent weeks, from $115 in the middle of 2014.
Findings also revealed that Russia’s latest agreement in principle with Saudi Arabia may be linked to the fact that weak oil prices are also hitting Russia’s commodity-dependent budget and the rubble, which touched all-time lows of around 86 per U.S. dollar last week. This is not an isolated case as Venezuela, another major oil producing nation and Angola are also faced with economic challenges arising from the oil price.
Interestingly, Russian Energy Ministry has slightly revised downward data on oil production in the country in December, to 10.80 million barrels per day (bpd,) from a preliminary reported 10.83 million bpd. Lukoil Chief Executive, Vagit Alekperov, reportedly said a fortnight ago that total oil production in Russia could decline by 2-3 per cent this year and possibly more if the government raises taxes. Lukoil’s own oil output exceeded 100 million tonnes (2 million bpd) last year, the company said earlier.
Beyond Buhari’s Shuttle
The oil diplomatic shuttle by both President Buhari and Dr. Kachikwu, one observer insists, was “timely” coming a week after Saudi Arabia and Russia agreed in Doha to stick to January production levels if others followed adding that “It affords the country an opportunity to lend its voice to the agreement that was reached by Saudi Arabia and Russia who are both oil majors. It is a win-win situation for all parties,” he stated.
While Saudi Arabia’s output is close to 10.1 million barrels a day, according to January data, Russia which produces about 10.7 million barrels of oil a day does not belong to OPEC, in which Saudi Arabia is lead producer.
Even at that, an oil and gas industry watcher and analyst, Faith Nwadishi, contended that oil producers need to meet and come to an agreement if the price of oil must be checked adding that for as long as supply outstrips demand, prices may continue to slide thus affecting revenues of oil producing nations the more.
Though observers believe the potential output freeze aims to stabilise a market in which prices have fallen to their lowest levels in 13 years, getting the oil price back Northward may not be that easy as other factors may still come into play. According to analyst, the factors include the shale oil from the United States and the ability to get Iran and Iraq to go along with the agreement to freeze oil supply. The two countries are OPEC’s second and third largest producers.
According to OPEC’s Monthly Oil Market Report, Iraq produces about 4.4 million barrels a day, followed by Iran at more than 2.9 million.
According to online site, Market Realist, Iraq will likely follow Saudi Arabia’s footsteps in curbing crude oil production or freezing production. The oil ministry reported that Iraq would freeze production at January 2016 level if other OPEC and non-OPEC members agree to the strategy. The country pumped 4.37 mmbpd in January 2016 according to Bloomberg sources.
It will be recalled that price plunged in 2014 when Saudi-Arabia influenced OPEC, refused to cut production in an increasingly competitive market, particularly from American shale oil producers.
“Nigeria of course is likely to support such a freeze. So I wouldn’t be surprised to see them voice their support to the freeze agreed in Doha,” Abhishek Deshpande, lead oil market analyst at Natixis in London, reportedly told AFP.
Nwadishi noted that the push for a freeze in supply will be beneficial to all oil-producing countries and expected Nigeria to support. She, however noted that, getting the oil price up again is beyond the president’s shuttle to the Gulf States adding that it was more of a function of “political economy.”
“The slump in oil price is affecting all the oil-producing countries; if you follow the history, even Saudi Arabia would want oil to sell for $1,000 per barrel if it were possible; Russia too. The agreement to freeze production is in everybody’s interest,” she told THISDAY.
Speaking further, Nwadishi explained : “The coming together of oil producers to agree to cut production and supply is key only if Iran will agree to cut down on supply coming out from sanctions recently, otherwise if supply continues to be higher than demand the price of oil will continue to be unstable. Right now supply is about two million barrels above demand.
“Again, if production of shale oil by US is not checked, it may affect prices; that is, assuming that China continues to buy crude oil being the second largest consumer of oil and they don’t go for shale oil instead of crude; so it is not a function of visits to the Gulf states but that of international trade,” she stressed.
In his submission, an oil industry analyst and Chief Consultant at Advisory Legal Consultants, Gbite Adeniji, argued that “the key to oil price rebound is for all the major oil producers to agree to cut down on supply to the market,” adding that “if all of them agreed to cut supply and a country like Iran refused to, the gains will be minimal. All the major producer have to agree to cut production before it can have a significant effect on price,” he stated.
Continuing, Adeniji dismissed the threats of shale oil and held that “shale oil producers are gradually shutting down because it will no longer be economical when you consider cost of production,” he maintained.
Expectations from Nigerians
Head, Energy Research at Ecobank, Dolapo Oni, believes Buhari’s visits “create an opportunity for a discussion around how other oil-producing economies that are more developed than ours are weathering the times and if there are any lessons to learn as well as opportunities to attract investment from those countries to Nigeria, such as we’ve seen from Qatar.”
Acknowledging that the president is the petroleum minister, having a more strategic role, and so, “discussing with these larger oil producers should provide strategic insights into how those economies have been able to grow production, boost reserves and savings, aligned oil with their economic realities etc. He believes time will tell if these were achieved.
Holding the same view, Executive Director, Corporate Finance, BGL Capital Limited, Femi Ademola, stated that “the current situation requires the President to coordinate with allies on the oil price issue, recovery of looted funds and terrorism.”
According to him, “there is need for some political deliberations and agreements to achieve the objectives.”
*Kunle Aderinokun & Olaseni Durojaiye – Thisday