On Wednesday, the members of the Organization of Petroleum Exporting Countries (OPEC) struck a deal in principle to cut oil production in an attempt to ease a global glut that has more than halved crude prices in the past two years.
The 14-nation cartel that controls over a third of the world’s oil production, made the decision after a two-year refusal to lower oil output in the face of falling prices. The decision to cut oil production quota to 32.5 million barrels per day (bpd) from the current production of 33.24 million bpd, may have put Nigerians on alert as the economy, which is already in recession, depends on oil sales for the bulk of its revenue.
However, details of the meeting reveal that Nigeria will be able to benefit from higher prices without having to reduce its oil production. Countries such as Iran, Nigeria, and Libya have been allowed to produce “at maximum levels that make sense” as OPEC members prepare to finalize national quotas by November.
As the Nigerian government continues to source for funds to implement the nation’s budget and alleviate the pressure on its local currency, the OPEC decision means that the country will be able to retain the level of its current revenue stream. In fact, the roughly 5% oil-price increase after OPEC’s decision was announced would mean hundreds of millions of dollars in extra revenue for the nation.
The deal is however far from a forgone conclusion. The OPEC agreement currently lacks firm details and a bigger jump in oil price may not actualize until a more concrete agreement is reached in the next meeting. There’s a lot of details that have to be worked out between now and then, such as individual country quotas, whose data sets they’re going to use — they can’t necessarily agree on whose data they’re using for production, sometimes — who’s going to face production limits and who’s not, said Martin King, vice-president of institutional research with Calgary-based FirstEnergy Capital. Some analysts remain sceptical about the physical reduction in oil output, arguing that the announcement may be an attempt by Saudi Arabia to ease pressure on rival producers before the next meeting.
“We remain sceptical about any effect in the physical crude market… The risk of abandoning the market share strategy before the market achieves balance is that a higher price could allow new supply from higher up the cost curve to reach the markets” said, Jason Gammel, an analyst at Jefferies, the investment banking firm.