Within the week, the World Bank said oil prices for the year 2017 could get up to $55 per barrel on the back of planned production cut by member countries of OPEC. It, however, stated that this was with some level of uncertainty. Chineme Okafor reports
In raising its 2017 forecast for crude oil prices to $55 per barrel from $53 per barrel, the World Bank said it was basing this on the back of plans by members of the Organisation of the Petroleum Exporting Countries (OPEC) to limit production after a long period of unrestrained output.
The bank said in the report containing the forecast, that energy prices, which include oil, natural gas and coal are projected to jump almost 25 per cent overall in 2017.
According to the revised forecast, which appeared in the World Bank’s latest Commodity Markets Outlook, oil prices are expected to average $43 per barrel in 2016, unchanged from the July report, but could jump to $55 per barrel in 2017 because the OPEC deal has the potential to impact the global oil market.
Its Senior Economist and lead author of the Commodity Markets Outlook, John Baffes, said, “We expect a solid rise in energy prices, led by oil, next year. However, there is considerable uncertainty around the outlook as we await the details and the implementation of the OPEC agreement, which, if carried through, will undoubtedly impact oil markets.”
The bank said a modest recovery was projected for most commodities in 2017 as demand strengthens and supplies tighten, adding that metals and minerals prices are expected to rise 4.1 per cent next year, a 0.5 percentage point upward revision due to increasing supply tightness.
It also explained that zinc prices were forecast to rise more than 20 per cent following the closure of some large zinc mines and production cuts in earlier years, while gold is projected to decline slightly next year to $1,219 per ounce as interest rates are likely to rise and safe haven buying ebbs.
Published quarterly, in January, April, July and October, the report provides detailed market analysis for major commodity groups, including energy, metals, agriculture, precious metals and fertilisers.
It said in its projection on agriculture, that prices are expected to increase 1.4 per cent in 2017, slightly less than expected in July, as food prices are projected to climb more gradually than anticipated (1.5 per cent) and beverage prices are seen dropping by a greater extent (0.6 per cent) on expectation of a large coffee output.
According to it, among food prices, grains prices are forecast to rise a steeper-than-anticipated 2.9 per cent next year, while oils and meals prices are anticipated to rise a slower-than-expected 2 per cent.
It also quoted its Director of Development Prospects Group, Ayhan Kose, to have said in the report that, “Low commodity prices hit commodity-exporting emerging and developing economies hard but now appear to have bottomed out.
“Growth in this group of economies is expected to be near zero for the year. Where feasible, policymakers should pursue growth-enhancing strategies, such as investments in infrastructure, health and education, in the context of a credible medium-term fiscal plan,” added Kose.
How the oil price forecast may affect Nigeria
The bank said that this edition of the Commodity Markets Outlook contains a special analysis of OPEC’s recent announcement of plans to limit production.
It noted that historically, agreements aimed at influencing the prices of commodities such as tin and coffee, have succeeded in swaying markets for a time but eventually lost that ability and collapsed.
According to it, OPEC’s ability to affect oil prices is likely to be tested by the expansion of oil supply from unconventional sources, including shale producers.
OPEC had recently agreed in Algiers, capital of Algeria, to effectively cut their oil production volumes to 32.5 million barrels per day (mbpd) from around 33.24mbpd, thus shaving off about 0.74mbpd.
The production cut news came to the oil industry as a landmark deal, one which will see output levels for each member country determined in November 2016, but will also exclude three of its members – Nigeria, Iran and Libya – from participating in the output cuts due to their peculiar production challenges.
The deal came through for the first time in about eight years, and was reportedly successful on the backs of Saudi Arabia softening its stance on its arch-rival Iran as well as on the mounting pressure from low oil prices.
While the group would reduce their output to 32.5mbpd, and determine how much each country will produce at the next formal meeting, it also extended an invitation to non-OPEC countries such as Russia, to join in the output cuts, at least to buoy its desire to see some improvements in prices. Russia has however indicated its willingness to cooperate.
The bank’s report however posited that the prospects of OPEC stabilising prices with its production freeze strategy could be tested by the ability of Nigeria, Iran and Libya to increase their production volumes significantly as other members would have to drop more of their production volumes.
“Should the Islamic Republic of Iran, Libya, and Nigeria raise production significantly in the coming months, larger cuts would be warranted by other producers to meet their overall targets,” it stated.
On this, it said: “OPEC members must agree on a number of issues, including individual member quotas, the base period for any cuts, the timing of implementation, and at what level excluded countries would cap production.
“A cut to 32.5mb/d would entail a 1.0mb/d reduction from current output, or 0.5mb/d if the ceiling were set at 33.0mb/d.”
On the brighter side, the report, however, said: “Should OPEC and other producers succeed in restraining production and lifting prices meaningfully, investment in oil production and non-OPEC supply would likely rise – especially in view of the flexible nature of shale oil production. This is likely to test OPEC’s ability to lift oil prices in the medium term.”
For Nigeria, the forecast and OPEC’s decision have come at a time she is faced with steady disruptions of oil production from her oil fields. While the OPEC deal provided her an uncommon opportunity, the price forecast sort of adds up as an inducement.
The OPEC decision will exempt Nigeria from participating in the output cuts, and allow her produce at levels previously allowed to her for the simple reasons that she has had significant production drop from February 2016 when militants in the Niger Delta started destroying oil facilities in the region.
From a 2016 budget production benchmark of 2.2mbpd, the country’s production slipped to about 1.6mbpd and then 1.75mbpd as recently disclosed by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu.
Kachikwu had said, so far, the ceasefire negotiated by the government with the Niger Delta militants had enabled production from oil fields in the region to come up to 1.75mbpd. He added that, this is however expected to rise to 1.8mbpd by October end and then 2mbpd by December 2016. Both developments – OPEC deal and World Bank price forecast will be significant in helping the country turn the corner in her economic recession.
When the OPEC deal was announced, the country’s ministry of petroleum resources stated that, it was delighted with it, and claimed it came through partly because of the loosely-tied role Nigeria and some others played in refocusing OPEC to work harmoniously to identify the needs and challenges that are peculiar to it and surmounting them.
It explained Kachikwu was vocal in calling for the exemption of Nigeria from the production cut, and that due to vandalism of oil and gas infrastructure, Nigeria had been unable to produce oil optimally in the recent past.
The ministry stated that a steady increase in oil prices which is one of the advantages that the deal will produce, and which the World Bank has predicted, would most likely contribute positively to the revival of Nigeria’s economy which is under serious challenge from low oil prices.
Also, in line with the bank’s forecast, a price increase could see Nigeria regaining some oil investments which are pending from the price drop.
