Global oil benchmark, Brent crude, hit an eight-week high on Thursday, as world leaders prepared to discuss a possible freeze in production levels. Brent, against which half of the world’s oil is priced rose, by $0.84 to $50.69 per barrel yesterday, marking its highest level in eight weeks. Nigeria’s economic woes began with the drastic fall in oil prices from over $100 per barrel in April 2014, to as low as $30 per barrel. Similar to heavy oil producers like Venezuela and Iran, Nigeria needs the oil price to rise significantly in order to balance its budget as the commodity accounts for 70 percent of its revenue. Oil prices have seen, on average, an upward trend in 2016 and have officially hit the $50 mark for the second time this month. The constant rise in oil prices since January may be interpreted a sign of better days ahead. After all, the fall in prices was the catalyst for Nigeria’s downturn. However, there are a few reasons to believe that things will not revert back to ‘normal.’
OPEC cuts are unlikely
The oil price rallied on the expectation that the meeting of OPEC (Organisation of the Petroleum Exporting Countries) members, next month in Algeria, would shore up oil prices but this may not the case. Nigerian Oil Minister Emmanuel Ibe Kachikwu said, last week, that a cut in the production of oil by the largest oil producing states is unlikely. Despite this, the meeting could help lift the price in other ways but it may require cooperation from countries like Russia, USA and Mexico. This is also not a given. Russian output currently hovers near an all-time high of 10.85 million bpd. It has signalled it is no longer keen on dialogue to freeze output and will continue boosting production. North American producers are also expected to add more barrels.
Low global prices may be the new normal
World oil supply has increased as high crude prices made oil exploration a more profitable enterprise. Driven by the newly economically viable hydraulic fracking extraction method, US oil production rose, and kept rising until the recent oil glut. US oil production has risen to its highest level in 46 years and this production has been resilient to the low price environment against the expectations of OPEC.
With the oil embargo lifted on Iran, they are expected to raise production from just over a million to 2.5 million barrels by the end of next year. This will push the price in only one direction: downwards. The market is already flooded with cheap oil and there will be many more barrels in the market than there are buyers. Even as some oil producing ventures have become unviable in the current climate, if prices recover to previous levels they may resume production. Like the United States of America, Canadian oil production has reached unprecedented levels in its recent history currently making it the 6th highest global producer of the commodity.
Global supply of the product has surpassed demand and, with alternative sources of energy gathering steam, the demand may remain tepid. Alternatively, prices can rebound to over $90 if large producers coordinate production but, as the interest of producers do not converge, the solution might not be a winning one.
Self inflicted woes
The catalyst to Nigeria’s crisis may have been the sharp dip in oil prices but it is deeper than that. An exchange rate peg imposed by the government did little to ease the impact of the fall in commodity prices instead, it cost the country dearly as investors pulled out amidst man-made uncertainties. The policy has since been reversed as the country’s reserves continued to dwindle but investors still remain wary. The militancy in the Niger Delta has reduced oil production capacity by over 700,000 barrels to 1.56 million barrels per day and domestic gas supply this year from 1,400 millions of standard cubic feet (mmscf) to 550 mmscf. In the unlikely event that commodity prices bounce back to over $100 per barrel, Nigeria is not positioned to take full advantage of the rise.
