The Organisation of Petroleum Exporting Countries (OPEC) concluded its December meeting agreeing to maintain current production levels. The conference was chaired by Nigeria’s Minister for State for Petroleum Dr. Emmanuel Ibe Kachikwu. Following the meeting, Dr Ibe Kachikwu asserted that demand for OPEC oil will rise in 2016. He however, did not explain how that increase, if it ever happens, will affect.
The meeting which was said to have been chaotic ended with members abandoning their decades long strategy of cutting production to stimulate prices and instead continued with the Saudi led approach that sees OPEC members compete for who can pump the most oil. This of course is in response to increasing production from Shale Producers and the other non-OPEC oil-producing countries. This long drawn strategy has had negative consequences for the global price of crude oil and immediately affected prices shortly after the meeting.
Brent crude price was down 80 cents, or 1.8 percent, at $43.05 at 2:33 p.m. EDT, having fallen earlier this week to a low of $42.43, within cents of August’s 6-½ year trough. U.S. crude settled 2.7 percent lower at $39.97 a barrel.
Decision not a surprise
The outcome of OPEC meeting did not come as a surprise to a lot of analysts. In an email statement to Nairametrics, Oil and Gas analysts Dolapo Oni (@Dolarpo) explains that OPEC’s decision to maintain output level at 31.5million bpd was expected for the following reasons;
- “OPEC had readmitted Indonesia and had to accommodate the country’s production of 911,000 bpd (oct 2015) in its output.
- Only Saudi Arabia could have made a cut. Everyone is feeling the pinch of lower oil prices including Saudi Arabia, who has had to spend more money out of their reserves than ever before.
- The indiscipline in OPEC is epic. No one really sticks to their quota. Everyone is trying to exceed it as a way to boost revenues.
- OPEC strategy is currently about defending market share and less about prices because they realize that if they cut without other non-opec producer cutting they would lose market share, especially in Asia.”
Impact on global oil supply
On its potential impact for oil supply in 2016 Dolapo Oni explains further;
“The impact is quite clear when you consider the following;
- The world has about 3 billion barrels of oil in storage in both commercial onshore and floating storage’s. This equates to 1 month of oil supply considering world oil consumption of about 96 million bpd .Thus, oil refiners could turn off demand for 1 month and still have enough oil to keep going for a month
- Recent climate change discussions are likely to spur a gradual reduction in oil consumption and substitution with natural gas and renewables in major oil consuming countries.”
Another analysts Walle Smith (@walesmit) in an email statement to Nairametrics opines that
“The implication of the OPEC’s decision means that global crude oil markets will continue to remain in oversupply leaving the burden for adjustment to fall on non-OPEC oil exporters where the pain of the lower oil price has resulted in US oil rigs falling by nearly half to 545 according to oil services firm Baker Hughes last week. Amid weak global energy demand, the emerging surplus in crude supply should translate to higher prospects for lower oil prices which have fallen to $43/b for Brent Crude.”
Implication for Nigeria
The implication of the outcome of this meeting on the Nigerian economy cannot be overemphasized. Nigeria currently faces stiff competition for its premium Bonny Light Crude. Dolapo Oni adds that with this decision “the global oil market will remain over supplied into 2016. Oil prices will dip lower and we could see Brent oil prices fall below $40 in December
He reiterates that “This could hurt Nigeria, which has seen its output decline considerably in 2015, while sale of its crude cargoes have faced difficulties.”
The implications are also sure to impact on Nigeria’s 2016 Budgetary expectations, stock market and more importantly the nation’s exchange rate.
According to Walle Smith,
“For Nigeria, the lower oil price means lower exports and by extension more pain for the Buhari government, which only in November revised fiscal deficit projection for 2015 to N2.103 trillion or 2.19 per cent of GDP. More worrying, it cast doubt over financing of 2016 budget which is projected at N7-8trillion.”
As Nigeria grapples with a currency crisis, monetary authorities would have had one eye firmly fixed at events in Austria where the OPEC meeting was held. Continuous glut in the market only means lower oil prices and reduces Nigeria’s ability to replenish its reserves. Walle Smith explains
“The possibility of a lower oil price also heaps more pressure on the Nigeria’s foreign reserves which dropped below $30billion last week and casts doubt over continued naira stability at 199/$ where the CBN maintains a no retreat no surrender approach. With ammunition running dry to defend the naira, Nigeria’s CBN governor might need to join Zambia on the prayer floor for some respite in commodity prices.”
For local investors hoping for a stock market rebound their faith in the market will need to be stronger as analysts do not see any respite in site. As Walle Smith explains, “Nigeria’s equity markets are highly correlated to crude oil prices and fresh downturn in the latter might drive further shake-out of investors leading to further losses.”
The All Share Index closed the week positive on Friday but still faces a stern test if it is to close positive by month end. With the market 20% down the dip in oil prices than became rampant this time last year has already taken its toll on 2015. It remains to be seen to what effect it will have on 2016.