As the Organisation of Petroleum Exporting Countries (OPEC) meets today in Vienna to decide on the extension of oil production cuts, oil prices have continued to rebound, on growing optimism that the cartel will stick to the cut for another nine months. In the build up to today’s meeting, there were deft diplomatic moves, led by the organisation’s defacto leader, Saudi Arabia, in the hope that there are no dissenting voices.
The price of Brent, which is equivalent of Nigeria’s Bonny Light, has hit $54.21 per barrel, as Saudi energy minister, Khalid al-Falih, flew to Baghdad for some last-minute diplomacy. Iraq seemed resistant to a nine-month extension, but al-Falih’s efforts appeared to have paid off.
“There is already an agreement of sorts between Saudi Arabia and Russia to extend the cuts to March 2018. What is not certain is how much the cut will be and who will take the lion’s share. I suspect it will also be Saudi Arabia, as before. More importantly, countries such as Iran, Iraq have also joined Algeria, Nigeria and Kuwait in supporting the call for the OPEC cut extension”, said Dolapo Oni, Head Energy Research Ecobank Group.
“The compliance with the cut since January, has been above 95 percent and at some point, was even over 100 percent, due to a heavier than expected cut by Saudi Arabia initially”, Oni added.
However, if at the end of the meeting today, the cartel fails to agree to extend the production cut, analysts say the decision would spell doom for the global economy.
“If OPEC fails to extend production cuts, we will naturally see further supply boom and then glut in the short term. This will cause both lower crude oil prices, as well as price volatility. Both conditions could spell doom for the global economy. Naturally, you may expect that prices may fall to an all-time low, following the breakdown of production cuts agreement,” said Chijioke Mama, energy research analyst and founder, EnergyDatar.
Oni said that “oil prices will gradually track towards the $38 – $48 range. The initial shock may push prices into more volatility initially, then it will likely stabilise in the $40s” if OPEC is unable to reach a decision to extend the cut today.
As a country that depends substantially on oil revenues to fund its national budget, Oni said that Nigeria would be more vulnerable to a shock in oil prices if OPEC does not make a cut and oil prices fall below $50.
“It would have significant revenue implications for Nigeria, with our budget now at $44.50 oil price benchmark”, Oni added.
“It could be disastrous for Nigeria, given the continuing reliance on oil. Low prices, coupled with price volatility, will make it essentially very difficult to successfully execute the ERGP and will further erode all recent gains within the economy”, Mama said.
Goldman Sachs is also of the view that the nine-month extension should normalise oil inventories, but risks loom for the second half of next year. “A nine-month extension would normalise OECD inventories by early 2018, in our view, but we see risks for a renewed surplus later next year, if OPEC and Russia’s production rises to their expanding capacity and shale grows at an unbridled rate.”
OLUSOLA BELLO & FRANK UZUEGBUNAM
