TOUGHER times seem to lie ahead for Nigeria as the Organisation of Petroleum Exporting Countries (OPEC) decided to maintain crude oil output despite pressure to cut production to ameliorate the effects of the plummeting prices on member countries’ revenues.
There was expectation from Nigeria and other members that the organisation would reduce production output to boost crude oil prices which have been on the downward trend since June last year.
The group arrived at this decision on Friday, at a meeting presided over by Nigeria’s Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, after Iran said it would not consider any production cut until it restores output scaled back for years during sanctions on the country.
But the cartel has always insisted on maintaining crude oil production, saying it can only agree to cut production if non-OPEC members would be willing to do the same.
Kachikwu disclosed that the group considered cutting production but decided that a reduction “even of five per cent” wasn’t likely to push prices higher if non-OPEC producers, which make up about two-thirds of global production do not join in cutting.
Internationally traded Brent crude oil fell by 91 cents to $42.92 a barrel l on Friday immediately OPEC decided to maintain its production quota. US crude futures – WTA dropped by over three per cent, or $1.22, to $39.86.
As at yesterday, crude oil prices have not recorded any significant improvement as the price of Brent remained at $43 per barrel while WTI was $39.97 per barrel, having fallen earlier this week to a low of $42.43.This is still far less than Nigeria’s crude oil benchmark of $52 per barrel in 2015 budget.
According to International Monetary Fund (IMF)’s regional Economic Outlook report for 2015, Nigeria needs a fiscal breakeven price of $122.70 per barrel to be able to fund its current budget for 2016.
To cushion the effects of this latest development, the Lagos Chamber of Commerce and Industry (LCCI), believes there is the need for the Federal Government to reduce the current oil benchmark for 2015 budget.
At the meeting, Kachikwu said the demand for OPEC crude was expected to rise by 1.2 million barrels per day to average 30.8 million barrels per day for the year 2016 leading to a more balanced market.
Kachikwu who is also head of Nigeria’s delegation to the 168th Ordinary OPEC meeting made this assertion while addressing the OPEC Ministers Conference in Austria, Vienna.
He noted that a balanced and stable market would be of crucial importance in the years ahead to ensure continued investment in the industry as it gears up to meet the world’s burgeoning energy needs.
The OPEC Conference president stated that the conference was centered on enhancing market stability which would benefit all stakeholders and contribute to global economic growth, stressing that this could be achieved only through the concerted effort of all stakeholders.
Dialogue and collaboration with consumers, non-OPEC producers, oil companies and investors are essential in reaching our common goal of a more orderly oil market. In 2015, we have seen positive examples between OPEC and Non-OPEC countries and the Asian Ministerial Energy Roundtable held in Qatar in November. OPEC has also held bilateral dialogues with Russia and China this year, and later this month the OPEC-India Energy Dialogue would have its first meeting,” Kachikwu stated.
Kachikwu maintained that OPEC remained committed to do its part in protecting the environment and supporting sustainable development, adding that OPEC and its member countries were taking part in the climate change negotiations in Paris with the goal of full, effective and sustained implementation of the United Nations Framework Convention on Climate Change.
The Lagos Chamber of Commerce and Industry (LCCI) predicted that crude oil prices may crash further due to the prevailing circumstances. According to LCCI, the international price of crude oil, which is currently trending at a six- year low of $40 per barrel, may crash further when Iran begins to enjoy its international pardon by pumping more oil into the already saturated market.
It said that this might further heighten the fiscal challenges presently facing the country. “With this development, we are expecting further downward adjustments in the budgetary benchmark of oil price which is pegged at $53 per barrel in the 2015 budget.
Further pressure on the value of Naira is expected as the development weakens the supply side of the foreign exchange market. The vulnerability of the Nigerian economy to external shocks is beginning to manifest with the collapse of oil crude oil price. The naira exchange rate is under pressure so is the foreign reserve; fiscal stability of the federal and state governments is at risk, as reflected in the inability of many public sector institutions to meet their financial obligations to contractors and civil servants.
The incidence of abandoned projects is on the increase. Capital flow reversals have intensified, manifesting especially in steady declines in the stock market.
“The implications of this scenario for the macro economy are quite profound and unsettling. From a fiscal perspective, these are certainly not the best of times for the economy”.
Some analysts however, said that the persistent fall in the prices of crude oil and its attendant impacts on the feasibility of 2016 budget financing maybe the driving force for naira devaluation next year.
According to them, as the market continues to await the 2015 appropriation bill to gauge fiscal policy direction of the administration, the current monetary policy direction has only shown a preference for boosting domestic credit growth to stabilising price level.
The crude oil prices in the international market renewed their slump trends as United States West Texas Intermediate fall below $40, while Brent Crude dropped two percent to $43 per barrel at the weekend, after the oil-producing group failed to agree on a new production quota in Vienna.
For the analysts at Afrinvest Securities Limited, the realities of funding the 2016 budget may ultimately lead to devaluation before the second half of 2016, which may signal a turn of market sentiment.
The analysts told The Guardian at the weekend that more realistic drivers of sentiment that may materialise in the short to medium term and garner investor confidence, especially for equities include effective articulation of a fiscal plan by the economic team to reflate the economy with key infrastructural projects.
The Head of Research, Ayodeji Eboh, said the projects must be in transport, power, support for small businesses, domestic agriculture and agro-based industries, reduction in government overhead and removal of unproductive spending such as subsidy.
“It is our opinion that the current equities market condition may persist with pockets of opportunistic value seeking position that may guarantee short-term market gains, which may not be sustained until any of the anticipated fiscal and monetary signals comes into force,” they said.