16 October 2016, Lagos — On Monday, global oil price benchmark, Brent, jumped to a one-year high after Russia indicated its willingness to join the Organisation of Petroleum Exporting Countries, OPEC, to curb crude production volumes and steady price.
Within the week, oil price rose from the $45 per barrel level it was on September 28 when member countries of OPEC announced their decision to cut output for the first time in eight years in a bid to steady the price slide, to more than $50 per barrel.
According to reports, Brent on which half of the world’s oil is priced had within this period hit its highest level since October 12, 2015, reaching $53.73 per barrel, and then cut back to trade at $53.18 by 7.10pm Nigerian time on Monday.
The price rise was in response to the remarks by Russian President, Vladimir Putin, that an output freeze or even a production cut was likely the only right decision to maintain energy sector stability, as well as moves by Russia to team up with OPEC to cut back production volumes.
Putin had said at an energy congress in Istanbul, Turkey that: “Russia is ready to join the joint measures to cap production and is calling on other oil exporters to join.”
That remarks according to experts meant that Russia, one of the world’s largest oil producer and non-OPEC member may be falling in line with OPEC, which had called on it and other non-members to join it in halting the price crash.
Putin’s declaration of Russia’s thoughts also followed with OPEC’s aims to agree on cutting about 700,000 barrels per day (bpd) to bring down its output to 32.5mbpd from 33.24mbpd by the time it meets in Vienna for its policy meeting on November 30.
Nigeria is expected to be exempted from the production cut deal along with Iran and Libya for peculiar reasons.
The sudden price rise sort of continued and by Wednesday of the same week, Brent crude closed trading at above $52/b for the first time since June.
This was further supported by data showing a fifth straight weekly decline in the United States crude inventories, yet Goldman Sachs Group Incorporated said after perhaps analysing the development that the price rally would stall at $55/b as the shale drillers in the US got back to work and a ‘wall of supply’ from investments made over the past decade hit the market.
Based on this, the Head of Commodities Research at Goldman Sachs, Jeff Currie, said in a report from Bloomberg that global oil markets were set to remain ‘oversupplied’ in 2017 amid the return of disrupted output in Nigeria and Libya.
Currie also stated that a resilient US shale production and the start of major projects inaugurated over the past 10 years would ensure that the price rally is halted at a point.
Notwithstanding Currie’s prediction on volumes from Nigeria returning back to the market, it does not really look like volumes from the country would likely increase as much as predicted because of the government’s laidback approach to resolving the security challenges that have impacted on production volumes from the Delta.
Minister of Petroleum Resources, Dr. Ibe Kachikwu, had stated that the country would end 2016 with about 2mbpd production level on the back of a resolution of the militancy challenges. Production data from OPEC’s monthly oil market reports for the month of October, however, stated that both from secondary and direction communications, daily production hovered around 1.524mbpd and 1.385mbpd in the month of September.
Impact of Price Rise on Nigeria
But for the continued production fluctuations, Nigeria would have recorded significant benefits from the price rise. Production from the country is still within the bandwidth of 1.7mbpd. Also, crude export from Brass River, Forcados and Qua Iboa, which are major export terminals for the country have reportedly remained shut or uncertain.
Speaking with THISDAY on this development, the Chief Executive Officer of the International Institute for Petroleum, Energy Law and Policy (IIPELP), Dr. Tim Okon, said the impact of the price rise on Nigeria’s finances could only become meaningful when certain actions are taken by the government.
Okon said though it was quite marginal and unpredictable, the development could be significant to Nigeria if the government for example retains its stance on petroleum products prices liberalisation, which in other words means continuing with its policy of deregulation and not bringing back subsidy on petroleum products.
He explained that in addition to keeping subsidy off its radar because it constituted a huge leak in government’s finances, it should also advance its efforts at ensuring stability of production and ramping up of volumes to maximise some appreciable gains in the price rise.
“The marginal increase in oil price arose from a statement of intent between Russia and Saudi Arabia. There has been a series of moves towards trying to moderate supply increases to stabilise the price.
“The meeting that was held in Algiers with OPEC agreed on some levels and Saudi Arabia has now reached some tentative agreement with Russia and so the rise immediately follows this statement of intent,” said Okon.
He further explained: “Oil prices are a function of many things and there are some fundamental things that oil prices reflect, some of them are inventories and if there is no reduction of inventories, we might go right back to lower oil prices.
“The second is sometimes exchange rate, the dollar has been strong against say the pounds and that usually exerts on crude oil price which are sold in dollar because a strengthened dollar can lead to a downward pressure on oil prices. There are other fundamentals that come into play anyway.”
“Whether it is a positive move for Nigeria will be dependent on two things – the continuation of price liberalisation and hoping that we do not have a return of subsidy or something like that no longer applies, in which case what accrues to the federation account will be higher.
“If that is what will happen, there is a marginal benefit because oil price at $50/b versus $45/b means a marginal benefit to government revenue, which is a good thing, but then you have to weigh that against continued militant activities and production volume since revenue is volume multiplied by the price,” he added.
Similarly, an energy business expert, Dan Kunle said the price rise might mean very little to Nigeria in terms of revenue flows because the country has a lot of internal structural adjustments to make in the operations of its oil and gas industry.
He said even if the price rise was sustainable, Nigeria’s peculiar challenges would mean that its benefits from it would be marginal.
“Is it sustainable? Because the fundamentals that led to the crash have not been addressed and Nigeria particularly have not finalised its internal structural adjustments to address the shock we had when the price went low.
“Even if the price is rising today, it is marginal and what is our volume as a nation that we are pushing out. The entire production of say 1.9mbpd does not belong to the country in total because we have an average of 55 per cent of that plus the petroleum profit tax,” said Kunle.
He added that the country’s import bills alone would make such marginal gains from price rise insignificant.
“Our import bills for food and others are still high and that makes it difficult because our earning from oil will still be low.
There is nothing spectacular about the increase because it does not look sustainable and even if it is, we have not increased production volumes to enable us benefit from the marginal increase in price. We must address the structural problems first,” he stated.
*Chineme Okafor – Thisday