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Opinions

OPEC’s influence on the Oil Markets

OPEC has been regarded as a cartel and has acted as a cartel of late.

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Saudi, Russia agree to cut oil by 20 million barrel, Further oil production cut required to keep oil price above $40 in 2020 , OPEC + deal to boost Nigeria’s earnings by $2.8 Billion

Over the years, we have seen OPEC assert its dominance in the markets. In the short term, as prices recovered in the past month, it is now evident that OPEC has the tools necessary to adjust the markets. Albeit U.S shale remains the albatross on their neck, OPEC is still the leader of the oil markets. In April, when US President, Donald Trump called on Saudi and Russia to end the price war and help the markets recover, it was conceivable that Shale’s influence on the market was waning. Several companies felt the effect of the oil price crash, and Texas, the home of U.S energy had increased levels of unemployment.

OPEC has been regarded as a cartel and has acted as a cartel of late. Last week, for May, the Joint Ministerial Monitoring Committee (JMMC) pegged its compliance with production cuts at 87%. OPEC also restated the essence for all participating countries to reach 100% of their pledged cuts and make up for any previous deficits in quotas for July, August, and September.

READ MORE: How substantial is compliance for the Oil market?

Iraq, Kazakhstan, Angola, and Nigeria prompted into action and ensured they fulfilled their parts of the cuts. Iraq, Nigeria and Kazakhstan have already submitted compensation schedules as the deadline for other underperforming members to submit was on the 22nd of June 2020. This sort of discipline is needed to offer support to prices, which translated into the recovery of the market.

The successful managing of the oil markets during this coronavirus era can be attributed to OPEC+, albeit they were responsible for the market plummeting months ago. In history, OPEC has always found a way to influence the markets during eventful periods. For example, the 1973 oil shock, the fall of the Soviet Union in 1991, and the Asian Financial Crisis all provided opportunities for OPEC to prove their mettle.

READ MORE: Nigerian Breweries brings the Bears to party, Investors down N20.5 billion

The Oil Cartel created in the 1960s allied with Russia and other nations, which results in the term “OPEC+.” According to Investopedia, this formation means they control over 50% of global supplies and 90% of proven reserves. What makes OPEC strong is the absence of alternatives to oil, and the de-facto leader Saudi Arabia, has the world’s lowest cost of production per barrel. The latter gives Saudi Arabia leverage to survive a crash in prices and creates some invincibility, which it leverages to dictate the market.

Conclusively, we have seen prices prop up and U.S shale suffering, OPEC+ seems like the influential deciding factor in the oil markets. It might lose its foothold in the future, but for now, the cartel calls the shots.

Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]

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Blurb

Dangote Sugar, sweet in more ways than one

Significant growth in gross revenue was driven largely by sale to Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited.

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Quick take: Sustained cost pressure weighs on profit, Dangote Sugar Refinery: Revenue recovers but cost pressures remain

By refining capacity, Dangote Sugar Refinery Plc (DSR Plc) is acknowledged as the largest Sugar Refinery in sub-Saharan Africa and one of the largest in the world. With up to 60 percent market share, it is also clearly, the most dominant player in the Nigerian sugar market.

DSR Plc recently released its audited Financial Statements for the year ended December 31, 2020 and overall and year-on-year group performance results were very good.

Despite the impact of the Covid-19 induced lockdown which curtailed distribution across the country and resulted in decreased revenues from income generated from freights, gross revenues increased by over 33 percent year-on-year to ₦ 214.3 billion. The significant growth in gross revenue was driven largely by a rise in revenue from the sale of its 50kg sugar, with the two main customers being the Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited who operate principally from Lagos.

Year-on-year, gross profit increased by over 40 per cent to ₦ 53.75 billion, Profit before tax increased by almost 53 per cent to ₦ 45.62 billion, and Profit after tax increased by 33 per cent to ₦ 29.78 billion.

Notwithstanding the good result, the group operating results showed some issues and headwinds. First, during the year, DSR Plc wound up Dangote Niger Sugar Limited (one of four companies that had been set up to acquire large expanse of land and locally grow sugarcane as part of its concerted backward integration project). The winding-up was sequel to continued community dispute over land acquired in Niger State for this purpose. This winding-up event cost DSR Plc approximately ₦ 100 million.

Second, there continues to be a heavy reliance on Lagos for its gross revenues as revenues generated from Lagos State increased significantly from circa 33 per cent at the end of 2019 to over 50 per cent by the end of 2020. The share of the Lagos segment in gross revenue thus continued to grow and currently represents a significant market concentration risk for DSR Plc.

Third, provision for impairment on financial assets or in simple terms, receivables that are unlikely to be collectable, also trended upwards from ₦ 1.3 billion in 2019 to ₦ 1.45 billion by end of 2020 with net financing expenses also rising significantly from ₦ 516.2 billion in 2019 to ₦ 1.92 billion by the end of 2020. This rise in expenses was largely driven by a significant rise in exchange losses incurred in the ordinary course of business, rising from about ₦ 7 million in 2019 to over ₦ 1.57 billion at the end of 2020.

Finally, administrative expenses represented mainly by employee salaries grew year-on-year by over ₦ 1.2 billion.

With the recent reopening of land borders, we expect that revenues and margins will become squeezed as sales and production volumes become constrained by the influx of largely smuggled, lower quality, and much cheaper sugar and its substitutes. DSR Plc’s sugar refinery is also strategically located very close to the Apapa port and its logistics operations, distribution of raw materials and delivery of finished goods will continue to be impacted by the infamous Apapa Traffic Gridlock and road diversions/closures around the axis. Although the effort of Lagos state and the recent introduction of the electronic call up of truck by the NPA has eased the issue, still, it needs to be watched closely.

Earnings per share at the end of 2020 was ₦ 2.45 (2019: ₦ 1.87; 2018: ₦ 1.85)

Subject to approval at its forthcoming Annual General Meeting, DSR Plc board of directors have proposed a dividend of N1.50k per ordinary share (2019: ₦ 1.10k, 2018: ₦ 1.10k).

This performance is sweet in more ways than one.

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Columnists

Currency deregulation and finding the true value of the Naira

Why does a government borrowing heavily choose to subsidize the dollar?

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A colleague said to me, “it’s uncanny how your Central Bank’s policy on Foreign Exchange is similar to that of Zimbabwe of 2008”.

I had to go check what Zimbabwe did and where it led them to.  Zimbabwe. after a bout of hyperinflation, abandoned its currency. Nigeria’s current arrangement may get us there.

It is a good time to own a BDC. BDC licenses can cost as much as N15m now. The same license cost about N3m some years ago. Why has it gone up? A BDC can generate a weekly return of N1.3-1.4m just on a $50k bid.  Most people can live on that. With a spread of N65 on a dollar: official at 410 and parallel at 475, why do you have to sweat?

So what is the impact of this? A long run destruction of the economy, a higher subsidy than calculated on petrol and a significant market distortion. A distortion that profits less than 1% of the population and sending a higher number into poverty.

READ: FG rejects IMF’s advice to devalue the naira

With, until recently, accretion to reserves impaired by low crude prices and low volumes, there is a rapid depletion of the country’s reserves. Why does a government borrowing heavily choose to subsidize the dollar?

The answer is corruption. Corruption played out supported by perceptions of what could happen to the middle class if the Naira were allowed to float. Nigerians tend to politicize the exchange rates. It’s for them a sign of economic management. Governments in power have that awareness. It’s part of the play in sustaining corruption.

The future is bleak. The external reserves shed over a $1billion in the last few weeks. Nigeria is consuming the present and the future. There is really nothing to show for the years of interventions. With the ongoing challenges in security and rising poverty, the destination is going to be a crash.

It is time for market unification. It is time for Nigeria to move to find the true value of the Naira. It must stop the corruption in the markets.

 

Written by Demola Adigun

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