One of Nigeria’s refineries

Over the past 18 months, crude oil prices have fallen to below $30 per barrel from their apex of above $110/b. They however recently began to notch up some gains and only last week got up to $39/b. Nigeria, which benchmarked her budget at $38/b would hope that such positive price movement continues into the near future, writes Chineme Okafor

In a pulsating show, global crude oil prices last week recovered some of their margins and finally beat Nigeria’s budgetary benchmark to trade at above $38 per barrel.

Although too early to jubilate, news of the price recovery gave a bit of optimism to authorities in Nigeria that perhaps, the country may after all gain some advantages in financing its expenditure proposal in its 2016 budget.

Against major criticisms, Nigeria in December 2015, pegged the prices of oil in her budget proposal to $38/b when the actual market price was $34/b and even though the Minister for Budget and National Planning, Udoma Udo Udoma, stated that the price benchmark would have no impact on the budget, the realities far outweigh the assumptions.

Again, the price rush also reinforced Nigeria’s spirited drive to get other oil producers to the negotiation table to try and find solutions to the prices slide. But even at that, the country through its Minister of State for Petroleum Resources, Dr. Kachikwu Ibe, still holds its expectations in check, as well, close to its chest.

It was in the same week of the price gains that Kachikwu, who had majorly chaperoned the price diplomacy with key oil producing countries of the Organisation of Petroleum Exporting Countries (OPEC) like Saudi Arabia, Qatar and Iran, as well as non-OPEC producers like Russia, announced that producers would as much appreciate the possibility of a $50/b situation if it ever gets to that level.

He admitted the humility of producers to invisibility of the price direction, and added that with the competitive production numbers and environment, it would be pretty difficult to see a dramatic rise in price.

More so, Kachikwu explained that it was a difficult situation for Nigeria, hence the continuous shuttling to meet other producers.

“I don’t need to tell you about the price of oil despite the shuttle diplomacy here and there. It is still very challenging but at least, we are inching up and for the first time we are beginning to have both the Saudis and the Russians come back on the table.

“When I started that whole move, I was very criticised and told that it would not hold but I am happy that over the last few weeks we see that everybody has bought into that and we are beginning to see prices inch up very slowly,” Kachikwu said, while speaking at the annual Oloibiri Lecture Series in Abuja.

He hinted that notwithstanding the minimal gains in prices, he intended to continue to push other producers to commit to a solution to the price dilemma. He announced then that a new meeting was in the offing.

“But hopefully, if the meeting that we are scheduling to happen in Russia between the OPEC and non-OPEC members happen about the 20th of March, we should see some dramatic movements and we are not likely going to see the prices of many years ago.

“I think we are very humbled today to accept that if we hit the price of $50 we will be celebrating and that is the target that we have,” he stated.

Why Nigeria Desperately Desires Positive Price Movements

Kachikwu painted a picture of what Nigeria was going through in the current situation and why it desperately needs a change.

According to him, “what this has done for countries like Nigeria that depends almost totally on oil revenues is that we are going through the most difficult times in the history of this country and so when you see changes in our ability to sometimes meet salaries in some states, it has become very major issue and we are working very hard to get the best value chain under the circumstances.”

Kachikwu at the last World Economic Forum in Davos was clear about his expectations that oil prices would rise to $40/b by the end of the year.

He had said: “Oil prices could get worse in the short-term, but the second half of this year holds more promise.”

The minister did not hide his desire to see prices pick up and therefore continued to engage relevant stakeholders to buoy this desire.

With Nigeria’s precarious oil revenue profile – the country had been hit hard by the falling prices of oil, Kachikwu spoke out, against Qatar’s desire that production levels long adopted by OPEC be kept untouched. Parts of his request which Iran has also refused to accept had been a call on production cuts by fellow producing members of the OPEC and other non-OPEC countries like Russia.

He advocated that at least such cut should be targeted at shrinking the supply glut, squeezing out the US producers and shoring up prices. He was firmly supported by Venezuela, another country in the same revenue shoes with Nigeria.

A Mild Hope of Recovery Perhaps

But then, oil prices, which began to rise above $38/b (after both a Venezuela-led advocacy and Nigeria’s have resulted in a proposal to freeze production outputs) closed at about $41/b on Kachikwu’s disclosure of the news that oil producers are planning to work together to reduce excess supply in the market.

Saudi Arabia , OPEC’s biggest producer, and Russia, OPEC’s long term non-member ally, had agreed to a production freeze which Iran don’t seem to welcome on the ground that it had some catching up to do with the rest of the producers who produced while it was on the fringes of sanction.

The plan by Russia and Saudi Arabia to freeze output at January production levels, is expected to be discussed further at the March 20 meeting which Kachikwu spoke about.

Followed by an industry report from the American Petroleum Institute, which showed a surprise drop in U.S. inventories by 3.3 million barrels, the March 20 meeting in Moscow could further buoy the positive price movement.

Also, the U.S. Energy Information Administration data that showed a much larger-than-expected drawdown in gasoline stocks last week, suggested a robust energy demand in the U.S, hence the 4.5 million barrels decline in gasoline stocks outweighed the 3.9 million barrels growth in crude inventories.

Yet industry experts consider this to be somewhat a little premature. In their analysis, these experts say that a rally back northward in prices may not be a real deal now especially when extant market fundamentals are considered.

For example, OPEC in its February monthly oil market report stated that ongoing excess supply, the weakening Chinese economy and lower seasonal heating demand have continued to weigh heavy on the market, making price movements to rather remain at a depressing level.

Moreover, OPEC noted that swelling crude and product inventories have also sustained their pressure on the difficulties oil prices currently face.

Some other experts also described the price movement as ephemeral, adding that it may not stay up for long.

According to them, the movement may not be far from the speculations that abound in the market, and which are mostly represented by what they described as non-physical barrels.

However, Bill Smith, chief investment officer and senior portfolio manager at Battery Park Capital, told news agency, CNBC, that while some investors could be predicting that market expectations for oil at $50 a barrel might be too fast, and too soon, the energy sector will find equilibrium by the second quarter of 2016.