Post-OPEC Deal: Oil price stability raises hope for budget benchmark

Post-OPEC Deal: Oil price stability raises hope for budget benchmark

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Hopes that the 2019 federal budget oil price benchmark would not be completely eroded appears strengthened as oil prices sustain stability days after output cut by members of the oil producing nations’ cartel, the Organisation of Petroleum Exporting Countries, OPEC, and their allies inked the papers to reduce output and starve off glut. The global benchmark, Brent crude  for February delivery, yesterday sold for $61.25 a barrel.

The benchmark of $60 per barrel was eroded by a sustained price drops from the year’s high of $86 p/b to about $58 p/b last week. But just as the Federal Executive Council, FEC emergency meeting on the budget was about to hold last Friday, a successful OPEC meeting on output cut prompted a price rally, rebounding to over $62 p/b. It had sustained that range with miner ups and declines since then. The OPEC and some non-OPEC producers, including heavyweight Russia, agreed last Friday to cut oil supply by 1.2 million barrels per day (bpd).   OPEC had agreed to an 800,000-bpd reduction, while non-OPEC members said they would reduce by 400,000 bpd.

Nigeria is expected to take 40,000 bpd cut in its output as part of the total OPEC’s cut. The Minister of State for Petroleum Resources, Ibe Kachikwu said this represents about 2.5 percent of the 1.7mbpd current production level of Nigeria.  He also stated at the recent OPEC meeting in Vienna, Austria, that OPEC did not grant Nigeria further exemption in the cartel’s output cut deal because the country did not request for that.

“We didn’t ask for exemption. We wanted to make sure everybody shared in the pain. If some happenstance occur, you are expected to come back to ask for exemption,” Kachikwu said.   Prior to the OPEC agreement, oil price had hovered below the $60 benchmark for more than four weeks, thus propping up fears that government may not realise its capital expenditure plans, as a downward review may become imperative if the downward oil price movement is sustained.

Meanwhile, industry experts have expressed mixed reactions following the OPEC production cut and the attendant price surge. Chambers Oyibo, former Group Managing Director, NNPC and  Chairman/CEO of Prime Energy Resources Limited, believes that Nigeria needs the oil price increase to boost its economy.   He stated:  “Nigeria needs the oil price to be above $60, so as to boost our economy. That is the reason the government supported production cut from the outset, though I am yet to know Nigeria’s share of the cut. It is good for us indeed. It is good.
“Nigeria has a budget benchmark of $60 per barrel. The budget needs to be funded adequately. The price increase therefore is a welcome development as it will help to fund the budget. “As for the sustainability of the price, it depends on OPEC, which I think wants it for a sometime. Though President Donald Trump of the United States does not want it OPEC has a lot of influence when it comes to pricing and its sustainability. Nigeria will definitely benefit from the OPEC decision.”

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Abiodun Adesanya,  Chief Executive Officer, Degeconek, an oil servicing firm specialising on geosciences consultancy, called for caution. “Nigeria should not be too excited about the production cut. We need to see what the United States and Saudi Arabia are up to. They are now friends following the killing of Khashoggi. Who knows what they  have up their sleeves?   President Trump did not want OPEC to cut production. He wants a low oil price. He knows the United States is the largest oil consumer in the world.

“However, the production cut has its plus and minus. You lose something, you gain something. Nigeria doesn’t want to lose in vain. We need to look at what we will gain if we cut production.   Nigeria has to be cautiously optimistic. We hope it works the way it is intended to work. “For the price increase, it is not something we can jump up to. It is not sustainable. In the long term, Nigeria should be concerned with getting out of oil price volatility by making sure we consume more of our products in-country. We must embrace gas usage, get our refineries working and encourage establishment of more refineries, use more of our oil and gas than we export. That will create jobs and grow our economy,” he said.

Emeka Ene, Managing Director, Oildata Services Limited, said that OPEC’s days as price swing appear to be numbered with the unfolding events. “The days of OPEC as a swing producer are becoming numbered. It took the combined efforts of OPEC and non OPEC producers including Russia to hammer out this current deal. Not discounting the influence of the Trump factor, geopolitics, United States – China trade issues and Middle East politics in establishing the oil price.

“All of this suggests uncertainty and dark clouds on the horizon. The only winners at this game have to be low cost producers for which Nigeria is not one. There should be urgent front and centre in restructuring the oil and gas industry. There are extremely high systemic costs which make it near impossible to drive the cost of production to below $10.

“Local content is now is now being used as a cover for corruption and high project delivery costs and established Nigerian companies who borrowed lots of money to expand capacity and train people are dumped in favour of brief case contractors with their international partners. Ultimately, what two people did in secret becomes inevitable 9 months later and Nigeria pays the price in high operating costs.

“The solution lies inwards driven by a relentless strategy of pursuing our national interest just like other more endowed countries seem to favour these days. NCDMB initiates such as supporting the top 100 Nigerian service companies, growing the domestic gas market, refining our crude, selling inefficient refineries etc will point us in the right direction,” he said.          For Dr. Boniface Chizea, an economist and management consultant, the production cut is welcome development. “The decision to cut production is a welcome development as the price of oil was trending southwards due to glut in supply. this is assuring as Russia, leading a pack of non OPEC producing members are also in the pact. “The only one authority we are sure is unhappy with this development is President Trump, who has been tweeting that the price of oil should be allowed to go further southwards to boost productivity and create jobs.

“We do not know if Nigeria and Libya were exempt from contributing to this withdrawal of supply as has been the case so far. If we have contributed, then the short term impact would result in reduced revenue which would worsen the country’s predicament, particularly with regard to deficit included in the budget of 2018. The fact that the price of oil has leapfrogged the budget benchmark price is music to our ears. As you know, it is eminently easier managing a surplus situation,” he added.

Source – vanguardngr


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