The recent announcement by the Organisation of Petroleum Exporting Countries, OPEC, of a cut/freeze in oil production by of 32.5-33 million Barrels per Day (MBPD), has been lauded as a move that will advance Nigeria’s economy if pipeline vandalism is curtailed.
On September 28th 2016, in Algeria, OPEC oil ministers rose from a meeting to announce the proposed cut in oil price. OPEC says it will announce the finer details of the production cut, and decisions about which country gets to cut what and by how much, at their next meeting in Vienna on November 30.
Although the details of the cut is expected in the next two months, the global markets have already started reacting to this news.
According to SBM Intelligence, the development is good for Nigeria as it is expected to attract the much needed foreign exchange to the government, a development which experts believe will translate to higher revenue to fund Nigeria’s 2016 budget and ease foreign exchange challenges.
Market watchers see this as a move aimed at increasing the price of crude in the short term to aid valuation of Saudi state oil companies in preparation for their IPOs. Hopefully, Nigeria’s quota will not be curtailed further as the country currently under-supplies.
The SBMIntel recent report said that Nigeria which had its highest average monthly supply in January 2016 stands to gain from the production cut, if effort would be intensified to stem the vandalisation of petroleum pipelines by Niger Delta militants, which has negatively impacted production.
“It is well documented how this has been impacted by the escalation of militancy by the Niger Delta Avengers which has targeted oil facilities” the report noted.
The report noted that Brent Crude, which has earlier gained $2, is expected to add an additional $7 -$10 by end of Q4, 2016.
“Just as importantly, Nigeria benefits more if they can tackle the militants who have yet again disrupted the critical TNP (Trans Niger Pipeline) impacting Bonny Terminal, as well as 29 September, 2016, bombing of a delivery line operated by the NPDC in Ughelli South/North in Delta State” says the SBMIntel report noted.
The report pointed that the expected growth should not impact downstream (petrol, diesel) prices too much, but will enhance additional dollar supply to ease marketers concerns as well as easier access to dollar supply.
According to the report, there has been a concern in Nigeria on how the government will react as the landing cost of petrol and diesel (Expected Open Market Price of the products) remains above the current ceiling of ₦145 per litre of petrol.
The most logical thing, the report pointed, will be to either raise prices, or to formally reintroduce the petrol subsidy. Either option will have far reaching political and economic consequences.
All of this was predicated on the details that will be agreed to by all OPEC members when they meet again in November. OPEC has made pronouncements in the past which died at the point where details had to be worked out.
It could be recalled that Nigeria’s Minister of State for Petroleum, Ibe Kachikwu, had asked that Nigeria be exempted from further cuts implying there was potential for Nigeria to ramp up production to January levels, or even slightly higher.
It is also important to note that the shale suppliers and non-OPEC markets are watching keenly as they are not bound by whatever cuts are agreed.
Experts believe an increase in prices will bring some of the shale companies in the United States back to the field and we may go back to where we were at the end of last year. Many of them have pegged the threshold for their return to the field at the $50/bbl mark. That scenario, is not good for Nigeria. Interesting times are ahead.