Oil field workers busy at a rig
Chineme Okafor writes on how the recent forecast by the World Bank that global oil prices will rise by an additional $2 per barrel may have been shaped by disruption of production facilities in the Niger Delta and the rising demand for the black gold
Nigeria, no doubt, is a recognised player in the global oil industry such that whatever developments that crop up from her oil fields could, in one way or another, affect the industry.
Recently, the World Bank indicated that it was raising its 2016 forecast for crude oil prices to $43 per barrel from $41 per barrel due to supply outages and robust demand in the second quarter of the year under review.
The bank in the July edition of its Commodity Markets Outlook published quarterly, and which provides detailed market analysis for major commodity groups, including energy; metals; agriculture; precious metals; and fertilisers, said it expected global oil prices to jump some percentage higher than it is now to close at $43 per barrel before the last quarter of the year, starting from October.
According to it, oil prices jumped 37 per cent in the second quarter of 2016 due to disruptions in supply, particularly from wildfires in Canada and sabotage of oil infrastructure in Nigeria. It however explained that despite possible return of shut-in volumes from these disruptions, it anticipates a slight increase in prices as the market oversupply dries up.
Though the bank did not state that continued disruptions in Nigeria’s oil fields could be one of the reasons from which the oversupply could be cut, industry watchers however feel that continued hostilities in the Niger Delta could in a way contribute to the bank’s forecast of a price rise.
“We expect slightly higher oil prices for the second half of 2016 as oil market oversupply diminishes,” said John Baffes, Senior Economist and lead author of the Commodities Markets Outlook.
“However, inventories remain very large and will take some time to be drawn down,” admitted Baffes.
According to a statement announcing the recent forecast of the bank, despite the recovery of oil and many other commodity prices in the second quarter of 2016, most commodity indexes tracked by it are expected to decline this year.
It said this trend was due to persistently elevated supplies, and in the case of industrial commodities which include energy; metals; and agricultural raw materials; weak growth prospects in emerging market and developing economies.
It, however, noted that most of the declines were projected to be smaller than expected in the April outlook.
“Energy prices, which include oil, natural gas and coal, are due to fall 16.4 per cent in 2016, a more gradual decline than the 19.3 per cent drop anticipated in April. Non-energy commodities, such as metals and minerals, agriculture, and fertilizers, are expected to ease 3.7 per cent this year, a more moderate contraction than the 5.1 per cent retrenchment forecast in the previous outlook.
“Metals prices are projected to fall 11 per cent in the coming year, a sharper decline than the 8.2 per cent drop forecast in April, reflecting weak demand prospects and new capacity coming on line. Agriculture prices are forecast to fall less than projected in April as a result of reduced harvests in South America and plateauing demand for biofuels,” said the forecast.
The institution said because energy constitutes more than 10 per cent of the cost of agricultural production, movements in energy prices have been a major factor in the path of food prices.
According to it, energy prices fell 45 per cent in 2015 and are projected to drop again this year. It said about one-third of the likely 32 per cent drop in prices of grain commodities and soybeans from 2011 through 2016 is due to energy price declines, adding that lower energy prices have also eased pressures to produce biofuels as an alternative energy source.
But prices could still end on a low range
Despite the bank’s forecasts, oil prices could still end the year lower compared with current levels and considering that the forecast would still be 15 per cent lower from 2015.
Even though the bank did not expressly state that prices will rise on the backs of disruptions in Nigeria’s production, the fact that a lasting solution to renewed militancy in the Niger Delta has not been found yet, means that large volumes of output could still be shut-in from time to time, and for as long as possible, creating some level of uncertainty on Nigeria’s crude oil.
Industry stakeholders indicate that if such situation continued, and deferred volumes from Nigeria are not quickly picked up by other oil producers to keep the oversupply open, then the World Bank’s forecast could eventually end on its assumptions.
Media reports indicate that already, the Niger Delta is sliding back into turmoil, and with profound implications for Nigeria’s economy. Latest insurgent acts by groups seem to have defied government’s extension of Olive branches to curtail increasing cut in oil production.
More views expressed by industry experts showed that whatever happens in Nigeria will definitely play a big role in the global oil prices, given her level amongst oil producing countries.
They noted that militants in the Delta have destroyed oil wells and pipelines which could take time to repair, and in that, output from the country could stay low for a while if no ceasefire is achieved between the government and the militants.
They likened the potential production drop to what happened in Libya when it went on a civil war in 2013 and stretched the capacity of other oil producers, especially member countries of the Organisation of Petroleum Exporting Countries (OPEC), adding that years later, Libya continues to suffer from daily production outages which the United States Energy Information Administration put at about 1 million barrels.
According to them, the country’s oil facilities such as the Forcados and Bonny Terminals as well as Escravos, have all been affected by the renewed militancy, while the military has reportedly continued to bark out threats to crush the militants if they refuse to accept dialogue with the government. These, they said, did not inspire the confidence that Nigeria was on top of the situation, hence, the possibility that it could drive the World Bank’s forecast to reality.