Economy Strengthens on Higher Oil Prices

Chineme Okafor reports that the steady rise in crude oil prices as well as some level of stability in Nigeria’s production levels is a good development for the economy

Some months back, few people in the global oil industry and especially in Nigeria were prepared to live with oil below the $50 per barrel price mark.
They had expected that the days of oil trading consistently above the $60 per barrel mark were gone for good, and their reasons were not farfetched.

In its 2016 analysis of the reasons why oil price slumped, the World Economic Forum (WEF) stated that the stunning fall in oil prices, from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016, was one of the most important global macroeconomic developments of that period.

It compared it with the sharp fall in 1985-1986, when OPEC members reversed earlier production cuts, and in 2008-2009 at the outset of the global financial crisis, adding that while the 1985-86 decline was mainly supply-driven, and the drop in 2008-2009 was almost entirely due to a collapse in demand, the 2014 fall appeared to be a mix of the two.
According to the WEF then, slowing growth in emerging markets, most importantly in China, had resulted to sharp drops in commodity prices almost across board.

It, however, noted that oil price drop was significantly steeper than in metals and food, adding that it appeared that the interplay of demand and supply were significant.
Coming after nearly five years of price stability, four things were listed by experts as reasons for the price decline.
First, it was stated that demand for oil by consumers had gone low because of weak economic activities, and increased efficiency levels in production as economies began to switch away from oil to other fuels.

Secondly, the crisis in Iraq and Libya which are two big oil producers with large production volumes, did not affect their output and so, they continued to pump oil.
Thirdly, the United State became the world’s largest producer of oil and even though it was not exporting them, it however, cut down its imports and created a lot of spare supply in the global market, and then finally, Saudi Arabia and its Gulf allies reportedly refused to make initial sacrifices of cutting their production levels to restore the price.

As it was the case, many countries, including Nigeria took a hit from the price slump, and in addition, Nigeria recorded a peculiar challenge in that its production levels also nosedived for many months on account for renewed militancy and destruction of oil facilities in the Niger Delta region.

Recovery efforts
It was not until 2016 that a spirited effort to restore market stability was initiated by member countries of the Organisation of Petroleum Exporting Countries (OPEC), who also copted its non-OPEC allies led by the Russian Federation to gradually halt the price slump.
Together with its allies, the OPEC initiated what eventually was adjudged a creative measure, in which parties agreed to cut down their production levels to take out excess volumes in the market and eventually stabilize price over time. The arrangement was signed and its implementation began in earnest.

Months down the line, OPEC and its allies reported some good progress with its plan, and after further assessments of its impacts on the market, decided to roll-over the arrangement been that prices were seen to have begun to climb back up.

Having watched prices rise from under $35 per barrel to now above $70, traders and analyst, this week began to openly talk about the potential return of oil price to about $100. They in their analysis posit that it has remained quite a good turnaround for oil especially as Brent crude hit $80 per barrel last week after the US withdrew from the Iran nuclear deal.

By its withdrawal, the US appeared to have re-imposed sanctions on Iran which is amongst the top producers within the OPEC clan.
Accordingly, prices have now gone to the highest level since 2014, when US shale oil rise appeared to have first swamped the market and prompted many to consider the days of a triple-digit oil prices over.

While demand has been reported to be really strong and boosted by a global economy that is growing at the fastest pace since 2008, and the potential impacts of the Iran sanctions in view, as well as OPEC and non-OPEC members reportedly recording good success with their measures, analysts believe that the price rally could be sustained further.
Also, there is a potential of the US sanctioning Venezuela’s oil over its opposition to a vote they believe was fixed for Nicolás Maduro.

Analysts who exchanged notes with Bloomberg, and which THISDAY obtained, stated that there was so much supply that crude prices crashed in 2015 and 2016, arguing however that such was no longer the case and that the market is extra-sensitive to geopolitical dangers and other shocks.

They even stated that other reasons why prices would continue on its northwards trend included the resurgent US dollar and a surge in production from Texas shale fields.
“Without a doubt, there are a variety of forces that could upset the balance and move us into a more volatile period,” said Ben Cook, a portfolio manager at BP Capital Fund Advisors, to Bloomberg.
Similarly, Bloomberg reported that Damien Courvalin, who heads energy research at Goldman Sachs, wrote to clients last week, saying: “Oil price volatility will continue to increase.”

Nigeria, uniquely primed to benefit

Going by Nigeria’s 2018 budget benchmark of $47 per barrel and 2.3 million barrels per day production, the growing changes appear to be heading in the direction it would consider a lot comfortable.
The country’s national parliament had approved a $47 per barrel price band, and daily production of 2.3mbd, but prices have gone more than $70 and production figures obtained by THISDAY from the April Monthly Oil Market Report (MOMR) of the OPEC, indicated that the country’s production levels were looking healthy.

Based on secondary sources OPEC’s April MOMR indicated that in January, February, March, Nigeria’s production were 1.785mbd; 1.792mbd and 1.810mbd. Though including condensates, the figures indicated a steady increase in production.

Also based on direct communication, the MOMR stated that it was 1,641mbd; 1,635mbd; and 1,686mbd for Nigeria in January, February, and March, still indicating some stability in the country’s production.
In-country experts told THISDAY that the development provided the country a sort of financial comfort to fund its 2018 budget, in addition to saving more money in its Excess Crude Account framework.

Though preferring that his name should not be mentioned in the paper, one of the experts explained to THISDAY that higher oil prices provide the country an opportunity to rebuild its financial buffers against a possible slump again in prices.
“Increasing prices and stable production are good for the economy because oil earnings will help to provide liquidity in the FX market and increase revenues at all levels of government, allowing them to deliver on their budgets.

“Crucially, higher prices also provide an opportunity to save oil earnings above the budget benchmark in the Excess Crude Account and Sovereign Wealth Fund. This will allow the build-up of an important buffer we can fall back on when prices eventually go down,” said the expert.

He however warned that the 2019 general elections were potential risks to the excess savings the country would get from the development, adding that the other tiers of government, especially the state governments may push for expenditures or disbursements from the savings to indirectly fund their political campaigns.

According to him: “Given the elections are less than a year away, FAAC may be tempted to spend all the additional revenues they get from the higher oil price, but they must find the discipline to save. If they don’t, then they could eventually be accused of refusing to save in a time of plenty, which is exactly the same thing this Buhari administration accused the Jonathan administration of doing.”

Related Articles