Last week OPEC announced a landmark deal that saw members agree a 1.2mbpd oil cut. The decision helped push oil prices to a 16 month high. However, there has been a push back today with oil prices sliding for the first time since the announcement was made.
According to several media reports, the market is afraid of an increase in production output that could jeopardize the 1.2mbpd cut agreed. Nigeria, it seems, is at the center of this fear. According to a Bloomberg report, fear about increased production in Nigeria and Libya is now a major concern considering that both companies were left out of the production cut.
Crude fell for the first time since the group of oil producers confounded skeptics on Wednesday by agreeing to cut production for the first time in eight years, a pact that may be challenged by rising production from non-member countries including Libya and Nigeria.
So why is Nigeria suddenly a concern?
As you can see from the table below, Nigeria and Libya were excluded from the production cuts because they currently produce below their current quotas. Nigeria for example, has only produced up to 2.5mbpd just once in almost a decade.
Nigeria currently produces about 1.9mbpd which is about 600k short of its 2.5mbpd quota. However, the concern here is that once production comes back fully on stream (Forcados is expected to resume full production next year) then Nigeria alone could add an additional 600,000 barrels per day to the market. This basically wipes out half the production cut that they agreed. This does not factor in Libya which could add another 300-400k assuming it goes back to its pre-crisis level output. Basically, the so called celebrated cut is at best net neutral.
The implication for Nigeria is all too clear. It’s always been a double whammy as increased oil prices appears to always be at the detriment of the country. It’s either prices increase due to increased bombing in the Niger Delta (which affects production) or prices drop due to a potential of an increased production from the Niger Delta. OPEC needs oil prices to stay above $50 if its member countries are to get their economy back on track. the country is to get our of recession. Incidentally, Nigeria needs it more than OPEC to stay out of the recession.