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Drop in U.S crude inventories and growing Middle East tensions seems to bearing much fruit as Brent oil held above $68 as Organisation of Petroleum Exporting Countries supply cuts gain more momentum.
The oil market extended its bullish run on Thursday after the Energy Information Administration (EIA) reported on Wednesday a drop in crude oil inventories of 2.6 million barrels, which implies inventories in the U.S which is taking less of OPEC – produced oil than ever are below the five year average for the first time since 2014.
“If inventories are coming down, it means oil producers will need to restock, leading to increase in demand which will obviously lead to the increase in price we are currently seeing,” Adeola Adenikinju, oil and gas analyst and professor of economics at University of Ibadan said.
“The Saudi Arabia and Iran clash will create a transitory effect which is temporal because of the uncertainties in the market; however the fundamental factor is the OPEC and its ally’s agreement which is very important,” Adenikinju, a confirmed member of the Monetary Policy Committee of Central bank of Nigeria told BusinessDay by phone.
Geopolitical threats to crude output also continue to support prices as both the U.S. and Saudi Arabia have criticized a 2015 international agreement to curb Iran’s nuclear ambitions.
U.S President Donald Trump has threatened to pull out of the deal and re-impose economic sanctions on the Islamic Republic, a move analysts say would disrupt oil output of OPEC’s third-biggest producer as Venezuela’s production slides continues.
“The present US government is currently showing the world that it’s not a country that honours agreement, so it won’t be a surprise if they don’t honour the agreement which will likely increase the price of oil,” Luqman Agboola, head of research at Sofidam Capital said.
“The regional rivalries between Saudi Arabia and Iran have always being there; however the crises will go beyond the crude oil prices that might lead to a negative impact on the global economy if not properly handled,“ Agboola said.
As heir to the Saudi throne, Crown Prince Mohammed bin Salman has been on a three-week visit to the U.S and has met with President Donald Trump and administration officials at the White House and plans to meet with energy executives to discuss the country’s plans to build two nuclear reactors by year’s end and 14 more over the next quarter century, according to the non-governmental U.S. Energy Association.
The Saudi prince is championing a new vision 2030 for the desert kingdom, one that is technologically savvy, religiously moderate and has a global influence beyond its oil prowess.
Also, uncertainties about Venezuela’s falling production, whose output has been halved since 2005 to below two million barrels per day due to an economic crisis, are also supporting the oil market.
The International Energy Agency said last week that Venezuela was “vulnerable to an accelerated decline” and said such a disruption could tip global markets into deficit.
Oil prices are approaching the highs of January after a global equity market rout. While investors continue to deliberate on surging U.S. crude production, OPEC and its allies have resolved that the market will rebalance between the second and third quarter of the year.
OPEC and 10 members outside the cartel, including Russia, have been holding back crude production by 1.8 million barrels a day since the start of last year, as part of an effort to rein a global supply glut and boost prices.
Nigeria’s oil production on the other hand has recovered to 1.8 million barrels as at February 2018, according to latest OPEC data, from as low as 1.2 million barrels daily in the thick of militant disruptions.
The price of Brent crude, Nigeria’s benchmark grade, fell 0.14 per cent to $69.37 per barrel Wednesday, according to Bloomberg data.
“When crude price enters its volatiles stage Nigeria is
expected to rely on Excess Crude Account (ECA) or Sovereign Wealth Fund (SWF) to fund its projects; however we have a situation where a lot of states cannot pay salaries putting a lot of pressure on this account which have poor decisional framework with zero legal backing,” Adenikinju concluded.
ECA for many years has been a subject of legal contention between state and federal governments.
The funds in the account are derived from the difference between budgeted oil price benchmark and actual market price at a particular point in time.
Last month, the Federal Government said it has disbursed a total of N1.91 trillion loans to states from the ECA, the budget support facility and the Paris Club refunds as of September 2017.
DIPO OLADEHINDE
