Nigeria emerged one of the losers yesterday, as OPEC producers reached a consensus not to cut oil production in order to stem the decline in prices.
An agreement was reached instead, for member countries to stick to the current daily output target.
The consensus to stick to the existing production quota of 30 million barrels a day, of which member countries have been overproducing by 300,000 bpd, is far short of the target of 1 million barrels per day, which analysts believe would be the minimum required to allow oil prices to recover, following a 34 percent slump since mid-June.
After the announcement yesterday afternoon, Brent crude dropped 4 percent to $74/b – a four year low.
According to analysts, Nigeria needs the price of oil at $ 122.70/b to balance its 2015 fiscal budget. The country produces 2.1 percent of total world output and 5.9 percent of total OPEC output.
“Saudi Arabia and the oil-rich Gulf monarchies can afford to take the long-term remedy,as they have enough cash reserves,” Theodore Karasik, senior adviser at Risk Insurance Management, said. “Libya, Nigeria and Venezuela, on the other hand, needed a quick intervention by OPEC.”
Nigeria’s fiscal troubles are compounded by the fact it has failed to replenish its oil fund after many years of high oil prices, with only $2 billion remaining in its so called Excess Crude Account (ECA).
“The lack of meaningful oil windfall savings suggests that Nigeria’s fiscal vulnerability kicks in well above the $77.5/bbl oil price benchmark included in the 2014 budget. The question is how the authorities will cope with an oil price below $ 100/bbl when they could not accumulate oil savings in a much more favourable context,” Samir Gadio, Head of the banks Africa Strategy and FICC Research said.
OPEC faced a dilemma between making cuts and leaving production targets unchanged, as member countries stand to lose revenue either way. With OPEC cuts, producers outside the cartel will ramp up production to fill the gap, taking advantage of the higher prices in the process.
Without cuts, the glut remains and prices continue to slide, pushing out high-cost producers in North America and the Arctic region, until the market stabilizes.
Abdourhman Ataher Al-Ahirish, Libya’s Vice Prime Minister and outgoing President of the OPEC Conference, said in his opening address, “as always, our deliberations will be focused on contributing towards stability in the market…and it is what matters most to all stakeholders, producers and consumers alike.”
He added that OPEC is open to dialogue with the G20, the EU and Russia, as well as working programmes with the International Energy Forum, the International Energy Agency and other international institutions, to reach a common goal of stability in the oil market.
Analysts expect oil prices to dip further, below $70/b.
JP Morgan analysts, David Martin and Upadhi Kabra, said in a recently released report that without an agreement by OPEC members on production cuts, Brent prices are expected to fall toward $70 per barrel in December, and could sink to $65 per barrel by early January.
Before the OPEC meeting, Iraqi Oil Minister, Abel Abdel Mehdi, said he saw a floor for oil prices of $65 to $70 a barrel.
The decision to not cut output meant OPEC decided to let the short-term oil price fall low enough and long enough to curb North American production, at the risk of member countries building up budget deficits.
OPEC’s next meeting is in June 2015 – unless an emergency meeting is called. The expected slump implies that oil-related assets are expected to bear the brunt of OPEC’s decision. The naira, which was devalued by 8 percent to N168 per dollar, would face increasing sell pressure as a direct result of the decision.
Additionally, the expected further decline in oil prices provides an opportunity for fuel subsidy removal. It is however unlikely that this would happen before the general elections.
Nonetheless, if the slump persists into 2H 2015, analysts predict fuel subsidies would be reduced or altogether eliminated in 2H 2015.
Diezani Alison-Madueke, the minister of Petroleum Resources, said the crux of the matter is not on production cuts, but collaboration with non-OPEC countries to stem the price slump.
“It’s a balancing game between OPEC and non-OPEC producing countries,” said Alison-Madueke at the OPEC conference. Any reductions might be “irrelevant”, unless other non-OPEC producers follow suit, the minister said.
Alison-Madueke stressed that OPEC needs to address many issues to stay relevant, adding that at the moment, Asian demand is more important than European demand.
Yinka Abraham