Nigeria and the Kingdom of Saudi Arabia were neck deep in negotiation over proposed cut in oil production for the mutual benefit of both countries and indeed the Organisation of Oil Exporting Countries, OPEC. Saudi Arabia, a leading light in oil production, like Nigeria which is the sixth in production rank, needs the product to remain within controlled production limit to be viable and lucrative.
However, production glut, coupled with a number of other crucial factors, have combined to thwart moves by leading OPEC member countries to control production surpluses and stabilise oil prices in the international market.
The two nations at a bilateral meeting in Riyadh hosted by the Saudi monarch, King Salman Bin Abdul-Aziz and President Muhammadu Buhari reiterated the imperative of working together to ensure that the prices are not only stabilised, but limits placed on production quota be respected and adhered to. Both leaders accepted the fact that their economies are tied to oil and that all cannot be well with both countries when the world oil market is unstable.
The current situation is depressingly worrisome for the federal government considering that over 80 percent of the N6.02 trillion budget for 2016 is based on oil proceeds. Though the bench mark was predicated on $38 per barrel, but going by the present oil prices, it hovers at $32 per barrel, the possibility of realising the set target seems far from being feasible.
Friday Magazine recalls that Nigeria, Africa’s biggest producer, capped its budget benchmark at $65 per barrel for 2015. This was only sealed after three revisions downward, following a panic-filled period in late 2014 where oil prices fell by more than 40 percent. At that time, the Finance Minister, Dr Ngozi Okonjo-Iweala, emphasised that the benchmark was a conservative one, saying; “the N4.3 trillion budget is based on a benchmark oil price of $65 a barrel, down from $77.50 this year, and a significant cut on previous budgets.”
Now, the benchmark is neither conservative nor predictable because of its high rate of fluctuations. The prices dipped to an all time low last January but later rallied to a reasonable rise that gave some breather to producing countries who were worried that Iran’s sudden return to the production circle and its determined rejection of production quota coupled with the ambitious production activities of the United States of America would further dampen production.
Midweek, oil prices slid, extending sharp falls from the previous session after top exporter, Saudi Arabia ruled out production cuts and industry data showed a further build in U.S crude stockpiles.
To worsen the situation, Iran made it clear that it has no interest in restraining production after sanctions against it were lifted, calling a joint Russian/Saudi proposal for major exporters to freeze output ‘laughable’.
U.S crude futures were trading at $31.14 per barrel down to 2.4 percent from their last settlement. International brent futures were down 1.4 percent at $32.80 a barrel. Both dropped more than five percent the previous day.
The falls were as a result of an apparent lack in cooperation among members of OPEC to freeze or cut production and rein in overproduction that has pulled down prices by 70 percent since mid-2014.
Saudi Arabia’s oil minister, Ali Al-Naimi, said on Tuesday that a coordinated production cut by OPEC and non-OPEC exporters was “not going to happen because not many countries are going to deliver”.
He also said that a proposed freeze in output at January levels, which were near record highs, would require “all the major producers to agree not to add additional barrels”.
While non-OPEC giant, Russia, has tentatively agreed on freezing its output at January levels, when they hit a post-Soviet record, Iran called the proposal ‘laughable’.
“Some of our neighbours have increased their production to 10 million barrels a day and now they have the nerve to say we should all freeze our production together,” Bijan Zanganeh was quoted by the Iranian news agency, ISNA.
“So they should freeze their production at 10 million barrels and we should freeze ours at one million barrels – this is a laughable proposal,” he said.
Chief Strategist at CMC Markets, Ric Spooner, said there was a risk oil prices could drop further as there was “no realistic prospect of a production agreement” and because of the upcoming low demand spring season in the northern hemisphere.
Singapore-based brokerage, Phillip Futures said it expected crude prices to trade in a range of $28 to $36 per barrel in the coming months.
Between one million and two million barrels of crude are currently produced every day in excess of demand, leaving storage facilities around the world brimming with unwanted supplies.
The American Petroleum Institute, API, said crude inventories rose 7.1 million barrels in the week to February 19 to 506.2 million, far exceeding expectations of a 3.4 million barrels rise.
Last month, Minister of State for Petroleum, Dr Ibe Kachukwu, had called for an emergency meeting with OPEC member countries to negotiate cut in production as a measure to contain oil glut and address falling oil prices in the international market. Nigeria’s position was shared by Venezuala which is also demanding adjustment in the production quota.
However, series of meetings between like-minded member countries tend to have yielded little dividend as some members are opposed to the reduction in production quota.
Kachikwu, who was president of OPEC until the end of December, said member states differ on the issue of intervention.
“One group feels there is a need to intervene. The other group feels even if we did, we are only 30 to 35 percent of the producers,” as 65 percent of supply comes from non-OPEC countries, he said at the Gulf Intelligence UAE Energy Forum.
“Unless you have this 65 percent of producers coming back to the table you really won’t make any dramatic difference,” he added. The situation it seems is yet to change as bickering over production cut continues.
Industry watchers believe that “Unless there is a convincing drop in oil output from Iran and Iraq, and the broader oil-producing community, the supply glut issue will persist, which means oil prices would remain under pressure for a longer period.’’
OPEC, whose 13 members include Saudi and Iran, decided last month against cutting output levels despite a plunge in oil prices, in a bid to maintain market share faced with competition from North American shale oil output.
Additional report from Reuters