OPEC has announced it is leaving its current oil-output target unchanged, resisting calls from Venezuela and other poorer OPEC countries for a cut in supplies. The cartel has essentially agreed to maintain its 30 million barrels per day supply which is about one -third of crude oil supplies in the world.
Analysts believe, the gulf states who wield enormous power in OPEC are more interested in retaining market share rather than maintaining prices. They fear that a cut in supplies will give more room for shale producers in the US to increase supplies as a higher oil price also favors more shale production. So basically, if OPEC maintains the current supply levels, the market remains over supplied thus dragging prices further down. Since, it is widely believed that a price level of $60 will make shale production unprofitable, their bet is that the threat of increasing shale production from the Americans will reduce thus helping maintain their market share. It’s basically a counterintuitive measure.
Following the decision by OPEC, Brent Crude dropped below $75 per barrel itching closer to Nigeria’s revised oil benchmark of $73 per barrel.
How it affects Nigeria
For Nigeria, the worry now is around how we can ensure we maintain our production benchmark for 2015 budget which they pegged at 2.2782 million barrels per day as contained in the MTEF. With the naira essentially devalued, the only other additional way we can ensure that we do not lose much revenue is to ensure we meet this daily production targets. If Oil prices fall below $73, then it is likely the government may have to revise its budget benchmark or run the risk of deficit financing (borrowing to fund budget). The CBN may also consider more drastic measures to save the naira from further depreciation as our external reserves is equally threatened. The way government handles this issue will surely have an effect on flow of money in the economy next year as well as funding developmental projects.
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How it affects stocks
Stocks in the Oil and Gas Sector will be badly affected by this decision at least in the short term. Seplat, the only full fledged Upstream player in the NSE has already being badly beaten since September. The stock closed lower today to N418 after appearing to rise earlier in the week as the market anticipated this decision. Other Oil and Gas stock are also not immune as they may fall under pressure also. The likes of Oando (which is to start a right issue on Monday) is one to watch whilst Forte Oil and other oil marketing companies are also closely watched. Banks which are exposed to Oil and Gas lending will also come under scrutiny considering that revenues from the sector will reduce, affecting the payment they can make to banks.
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The likes of Oando and Seplat paid a lot for assets previously owned by IOCs (Shell, COP etc.) based on valuations that put oil prices at above $100 per barrel. Therefore, now that Oil prices have received they could fall under new risk such as valuing their good will (which could involve impairments), revenue projections, margins, loans etc.