Oil price: Hope rises for producers, consumers worry
The upsurge in oil prices since OPEC recently reached a deal to limit oil production has been interpreted as a sign of better days ahead for Nigeria, but should consumers worry about a potential rise in the price of petrol?
The Organization of the Petroleum Exporting Countries (OPEC) on November 30, for the first time in eight years, reached a deal to cut their oil production levels by 1.2 million barrels per day in order to raise global oil prices.
OPEC, a cartel of 13 major oil exporters, currently produces 33.7 million barrels of oil per day (bpd). As part of the deal, they will bring production down to 32.5 million bpd, with Saudi Arabia, Iraq, UAE, and Kuwait making the biggest cuts.
Saudi Arabia, OPEC’s biggest producer, will cut production by around 486,000 bpd. Second largest producer, Iraq agreed to reduce output by 200,000 bpd. Libya and Nigeria were exempted, as their output has been hurt by unrest and violence.
Since the announcement, oil prices have surged from $46 per barrel up to $53.77 per barrel as at the first week of December.
Investment bank Goldman Sachs in a report estimates that oil price will average $55 a barrel in 2017, on the basis of the cuts. Others, including global energy watchdog the International Energy Agency (IEA) also in a report said the market likely will become undersupplied by the first half of next year.
Barclays bank said OPEC’s strategy is “bound to overshoot” and that while oil will reach $60 a barrel in the coming months, it will then fall back to $52 in the second half of next year.
Despite the latest rebound, prices remain far lower than they were back in 2014, before the price crashed from about $100 per barrel down to $40, costing oil producers like Nigeria billions in lost revenues.
Energy analysts have warned of a series of hurdles ahead saying a lot is still uncertain about this latest deal that could see prices easily sink again in the coming months.
First, the agreement which is to last six months starting in January, they said, is contingent on non-OPEC producers slashing their own output by 600,000 barrels per day. Though, Russia after talks with OPEC members on December 10, reportedly committed to cutting its own supply by 300,000 barrels.
Second, some OPEC countries could end up cheating on their quotas as this has happened before. Particular attention will be given to whether Iraq follows through, since its leaders grumbled about accepting cuts in the run-up to the meeting. OPEC said it will have its next meeting on 25 May 2017 to monitor the progress of the deal.
Again, there is the question of what happens next in the United States. Over the past year, with prices low, many oil companies in the US have idled their rigs. If prices now rebound, those companies could start drilling again; supplying more crude and driving the market back down.
Why rising oil price matters for Nigeria
Nigeria’s economic woes began with the drastic fall in oil prices. The country needs oil price to rise significantly in order to its balance its budget as the commodity accounts for 70 percent of its revenues.
Decreased oil revenues from lower exports due to militant attacks on oil assets, coupled with the persistently low crude oil prices, battered Nigeria’s economy which is now witnessing galloping inflation and first recession in 25 years.
President Muhammadu Buhari during the 2017 budget presentation to the National Assembly said Nigeria has experienced low oil prices in the past 18 months that has brought down foreign exchange earnings by 60 per cent. The naira has fallen drastically against the dollar since 2014.
Uncertainty surrounding the future direction of oil prices has led to Nigeria adopting a conservative budget for 2017 set around crude export price of $42.5 a barrel and a production target of 2.2 million barrels/day, the same output level set for 2016.
But the recent rise in oil prices since OPEC reached the deal may be interpreted a sign of better days ahead.
Minister of State for Petroleum Resources Ibe Kachikwu said that the healthy price of crude for Nigeria would be in the mid-$50s.
The prospect of less pumping of oil and consequent rising prices could lift the troubled economies of oil-dependent nations like Nigeria.
According to OPEC’s monthly report published on Wednesday, Nigeria’s crude oil production rose by 62,700 bpd from October, the second-highest nominal increase in production among OPEC members after Angola.
Experts say higher oil prices coupled with increased export will lead to a wave of capital that will flow into the country with the end being lower interest rates, more financial liquidity, higher asset values and ultimately greater consumer confidence. In short, higher oil prices could boost the country’s economic recovery and growth. No excitement for consumers The odds of rising crude oil prices are high but while that would be welcomed by oil producers, consumers might not be that excited as higher crude price mean potential increase in petrol pump price. The general tendency is that when oil price falls, consumers are happy while producers are unhappy.
According to the US Energy Information Agency (EIA) crude oil prices make up 71 per cent of the price of petrol. The rest of what consumers pay at the pump depends on refinery, distribution costs and other associated costs which usually remain stable.
Analysts therefore predict a surge in petrol prices following the agreement by oil producers to cut global output which has seen crude price surging high.
Already the cost of petrol in some consumer countries is close to rising.
The UK mirror reported on Tuesday that in some parts of the country, the cost of a litre of fuel is set to rise by about 3pence.
It quoted motoring group the AA to have said that the average price would rise from £1.15 a litre to £1.18, though in London and parts of the south-east, where prices have already hit £1.17, the figure could rise above £1.20 in 2017.
In India, authorities have informed consumers they may soon have to cough up more, though the fuel price hike may happen in installments, media reports said. The government might need to raise petrol and diesel prices by up to 6 Rupees a litre when they review fuel prices mid-December.
For Nigeria, the outlook is uncertain. The country is struggling with its four domestic refineries. When Nigerians go to filling stations, they buy mostly imported petrol and diesel. So Nigeria exports its crude and buys back the fuel it needs.
For Nigeria, the outlook is uncertain. The country is struggling with its domestic refining system. Its four refineries barely work so the country exports its crude and buys or imports back the fuel it needs, a practice that drains much-needed foreign exchange. With oil marketers having difficulties accessing foreign exchange needs for petrol imports, the Nigerian National Petroleum Corporation (NNPC) has taken up the challenge of supplying more than 70 per cent of fuel consumed in the country and bearing the brunt to keep prices at current levels. It is not yet certain how long it can continue to sustain this huge burden .