The global bank Goldman says it was maintaining its bullish outlook for international oil price a sharp drop in price forced by signals that leading producers Saudi Arabia and Russia would increase production.
In a research note sent to its clients and investors yesterday and seen by BusinessDay, analysts at Goldman said, ““while the announcement lifts some of the uncertainty on whether and when OPEC and Russia would increase production, we do not view this as a material change to our bullish oil outlook.”
Several Oil producers like Nigeria are counting on higher price to reverse their budget deficit and cut escalating foreign debt and in Nigeria calls are already mounting that the government would have to put in place a credible mechanism for managing the excess revenues from oil sale.
According to the note, “in short, the market remains tight and the outlook is still constructive.” It is the view of the Goldman research team that the response by Saudi Arabia and Russia is occurring simply because of a tight market and the magnitude of the promised intervention by the two oil producers remains uncertain and even if it comes in at one million barrels daily, such an increase would simply offset the voluntary production within OPEC and there is still the commitment by the cartel to restrain production among members.
According to the report any intervention by the Russians and the Saudis will be gradual and would leave the global oil market in deficit through quarter three of 2018.
In addition, the researchers based their bullish outlook on other factors including the production disruption in Venezuela, saying , “ongoing disruptions in Venezuela and potential losses from Iran are likely to partially offset this higher supply as well as require increases in production in 2019, which will further reduce already limited spare capacity next year.”
Saudi Arabia and Russia signaled at the weekend that they would likely ease their production cuts in the second half of the year.
Comments by their Energy Ministers suggest that such a decision would be driven by concerns that high oil prices start to impact global economic activity and was spurred by pressure from the US and China to bring barrels back online. On the back of the announcement, oil prices have sold off on these comments with Brent down from a high of near 80 percent to $76.44 /bbl
The research note said despite greater clarity on the OPEC/Russia response which was delivered yesterday, some might be led into thinking the oil market is on a smooth path to rebalancing.
“Instead, the current level of the market deficit, the robustness of the demand backdrop, and the rising levels of disruptions all set the stage for inventories to fall further all the while OPEC spare capacity is drawn down.
“As a result, even if today’s headlines provide a cap on prices in the short term, we reiterate our $82.5/bbl 3Q18 Brent price forecast (which effectively embedded such a supply response) and still see risks to prices in 2H18-2019 as skewed to further upside. In fact, history shows that increases in OPEC production quotas in a strong demand environment (like today) are followed by higher prices in the subsequent months.”
Brent crude the benchmark of Nigeria crude Oil prices continued to continues to fall lower from their highest levels of $80 in nearly four years yesterday amid reports of a looming output increase from several major oil producers such as Russia, United States and Saudi Arabia.
“The market is doing a market balancing act; the initial increase was as a result of speculations so the current market reactions we are currently witnessing is also as a result of speculations,” Luqmon Agboola head of energy and Infrastructure at Sofidam Capital said.
“Looking at the oil market there is a particular higher oil price that will hurt either the producers or the consumer however the beyond the speculations there is a particular market price that will be a win-win for everybody which is where the market price will eventually stay in,” Agboola told Businessday.
Emmanuel Afimia energy analyst at Afimia consulting limited said increase in quantity supplied of crude oil will shorten the strain between quantity demand and quantity supplied thereby leading to the fall in price.
Oil prices have been under pressure since late last week after news that OPEC and Russia were set to boost oil output to compensate for lost supply from Venezuela and Iran, who were previously hit by US sanctions.
“These countries increasing oil production are only trying to benefit from the Iran and Venezuela dilemma,” Agboola told BusinessDay by Phone.
Prices in the oil market have been steadily rising since last year, with global benchmark Brent climbing to multi-year highs of $80 a barrel earlier this month. However, more recently, crude futures have slipped amid renewed fears of an oversupplied energy market.
Last week the US Energy Information Administration (EIA) said in the last seven years the US has pumped more oil and gas out of the ground than any other country in the world.
The independent energy statistical agency describes the US as “the undisputed oil and gas leader in the world over the next several decades.” It comes as Russia and Saudi Arabia are constraining production to lift prices, while new technology is making vast new pools of once unprofitable hydrocarbons economical to extract in the US.
The EIA estimates that the US pumped the equivalent of 30 million barrels of oil per day in 2017, a record high. (The figure includes all hydrocarbons such as natural gas, crude oil and others.) That puts the US well ahead of other major producers, including Russia and Saudi Arabia. US natural gas production stole the top spot from Russia in 2008, and exceeded Saudi Arabia’s oil production in 2013. The world biggest consumer of crude oil China has said it remains committed to Iran’s nuclear deal with world powers and assured Tehran that it will continue buying nearly one-third of Iranian oil exports.
“We shouldn’t be surprise by this because China always had a strong relationship with Iran in the past,” Agboola said.
China who was also the last world power that signed the 2015 nuclear agreement buys the largest share of Iranian oil while majority of the rest is sold to the other top Asian consumers such as Japan and South Korea, who have also indicated that they will continue business with Iran despite the U.S. decision.
India and European Union have clearly indicated they had no intention of changing their buying habits regarding Iranian crude, with the EU specifically signalling it would make an effort to uphold the Iran nuclear deal and shield companies doing business in the country from U.S. sanctions.
Saudi Arabia, a longtime rival of Iran, has struck a production deal with Russia, an Iranian ally that is also being sanctioned by the U.S. The question now is whether Saudi Arabia and OPEC in its “Vienna Alliance” with Russia will keep oil production targets the same or whether they adjust them to meet any loss of Iranian crude, with oil prices already high and rising. But while the OPEC countries and Russia have largely been successful in their efforts to control the oil market in the last year, this may soon be out of their hands.
When asked if the buyers of Iran oil can buy Nigeria oil? Ademola Adigun, an oil and gas governance consultant said “Iranian oil is not as light as Nigeria’s oil however the good thing about Nigeria’s oil is its very flexible, and anybody can use it.”
Current crude oil prices would be welcome by Nigeria, Africa’s largest oil producer whose economy is still majorly oil dependent rather than sustainable government policies.
According to the most recent OPEC data Nigeria oil production hit 1.7 million barrels daily in May 2018, representing a 50 percent increase from the 1.2 million barrels produced in the thick of militant attacks.
Last week the National Assembly passed a record N9.12 trillion budget for 2018 as part of on-going efforts by the 75 year old President Muhammadu Buhari led-administration who is also seeking second term in office to diversify the economy away from oil by boosting the non-oil sector.
A barrel of Brent oil sold for $75.30 on Monday May 11, according to data obtained from the Bloomberg terminal.
That’s a 36 percent increase compared to the same period last year ($55.2) and a 67 percent leap from an average of $43.10 per barrel in January 2016.
Oil production hit 1.8 million barrels daily in February 2018, representing a 50 percent increase from the 1.2 million barrels produced in the thick of militant attacks, according to the most recent OPEC data.
“The present oil price should have an immediate positive effect on Nigeria’s economy, But corruption is the elephant in the room,” Abayomi Fawehinmi, a Lagos based energy analyst concluded.
DIPO OLADEHINDE, with agency report
