Recent developments in the global oil market have indicated that there may be a repeat of the great oil price burst of 2014 when Brent dropped significantly from $115 per barrel to as low as $35 in 2016. The event which slowed down growth in oil-dependent economies like Nigeria.
Essentially, the sharp fall in oil prices which was witnessed in 2014/15, was broadly similar in magnitude to the decline in 1985/1986, which was as a result of the reversal of Organisation of the Petroleum Exporting Countries (OPEC) members to continue the agreed reduction in oil production.
The last oil price burst in retrospect
The oil price burst that occurred between mid-2014 and 2016 was unarguably the biggest drop the global economy had ever witnessed in modern history. According to the World Bank, the initial drop in oil prices from mid-2014 to early 2015 was driven by a growing supply glut which includes U.S. Shale oil production, receding geopolitical concerns, and shifting OPEC policies.
Specifically, the U.S. booming shale oil production within that period played a significant role in the oil price burst due to the efficiency gains enjoyed by the U.S. shale oil.
The most recent oil price burst cast a long shadow for oil exporting countries, leading to a significant decline in investment and weaker output growth over an extended period of time.
The U.S as the world’s largest oil producer
Prior to the United State’s emergence as a major oil producer, there were speculations around the “Peak Oil” theory, which explains that global oil production would soon enter a terminal decline, thereby, skyrocket prices to plunge the world into crises. However, since the United State’s emergence in the market, oil output has more than doubled. The Energy Information Administration (EIA) says the U.S. has moved past Russia and Saudi Arabia to become the world’s largest oil producer.
According to Halff, a senior research scholar at Columbia University’s Center on Global Energy Policy:
“The market may become a little bit more volatile as we go forward and we might expect larger price swings.”
Also Robert McNally, President of Rapidan Energy Group, reportedly stated
“there’s essentially no one behind the wheel of the oil market. The 15-nation oil cartel OPEC will periodically cut or boost output in times of emergency, but its de facto leader, Saudi Arabia, has not actively managed the market since 1985.”
OPEC guiding against history, but recent developments suggest things may fall apart
Since the formation of OPEC, oil prices have crashed three times. The first crash occurred in the mid-1980s, just ten years after its formation. Also, the second crash came at the onset of the Great Recession in 2008 below $40 a barrel. The last one occurred in 2014-2016 when oil prices decline to an all-time low average of $35 a barrel.
Over the decades, the focal point of OPEC has always been to improve price through its supply mechanism, a similar method adopted to come out from the 2014 bursts.
It is instructive to note that in 2015, the U.S. reportedly surprised the global economy by increasing Oil supply in 2014 despite the crash in oil price. This suggests that the U.S is a strong anti-oil price increase.
Very important that OPEC increase the flow of Oil. World Markets are fragile, price of Oil getting too high. Thank you!
— Donald J. Trump (@realDonaldTrump) March 28, 2019
Lately, there has been fierce tussle among the big players in the global oil industry which include the OPEC, OPEC+ and the U.S President Donald Trump.
Trump’s Iran Decision could kill OPEC deals – Nigeria should brace up as $40 a barrel oil price possible
Trump’s decision to let Iran waivers expire could completely kill off OPEC alliance, unleashing serious blow on the Cartel’s ability to coordinate production cut, which analyst suggest may drive the price as low as $40.
Earlier, Russia’s finance minister Anton Siluanov, reportedly disclosed that Russia and OPEC might decide to increase production to fight for market share with the U.S. This, according to him, would drive prices down and impact the U.S negatively.
“(If the deal is abandoned) the oil prices will go down, then the new investments will shrink, American output will be lower because the production cost for shale oil is higher than for traditional output.” He said that prices could drop to $40 per barrel or even less for up to one full year.”– Siluanov
Similarly, it has been disclosed that Saudi Arabia and Iraq are prepared to reverse oil production cuts against the backdrop of Trump’s Iran sanction. Saudi is seen as going too far to work with the American Government, and the rest of OPEC+ may abandon the deal. According to Oliver Jakob, head of PetroMatrix GmbH:
“Saudi Arabia is now in a difficult position of having an alliance with Russia to reduce oil supplies and having an alliance with the U.S. to increase supplies. You can’t have it both ways for too long.”
These developments suggest that oil production cut by OPEC and its allies (OPEC+) is just about to collapse; if report indicating Iran’s move to negotiate with the U.S to reverse the sanction is anything to believe.
Against this backdrop, Planning the 2019 budget around $60 a barrel of oil is an interesting speculation to observe. Like Saudi Arabia, Nigeria cannot undermine full fledge diversification from oil. Otherwise, the economy is likely to plunge into recurring revenue crunch as oil price burst looms.