Emerging stability in oil output may force Nigeria, Libya back to OPEC cut bracket
Though the Organisation of Petroleum Producing Countries (OPEC) failed to include a clause that if stability returns to exempted producing nations and their output rises to normalcy, they should join the cut basket; indications are rife that Nigeria may soon be under pressure to join cuts.
The OPEC and non-OPEC cuts have failed to have the desired effects so far, with oil inventories not falling at a preferred pace and prices now hovering at seven-month lows.
But despite strong OPEC and non-OPEC compliance, surging US shale output and stubbornly high US inventories have led to bearish sentiment.
The essence of the cut, ab-inito was to drive up the global oil price so that members could make gains to stabilize their economies.
But considering the observed rise in crude oil production in Nigeria, the country is becoming under pressure to join to avoid undue advantage over other members of the basket.
Business Hilights recalls that the deal original called on OPEC to cut 1.2 million barrels per day and 10 major non-OPEC countries, led by Russia, to cut a collective 558,000 bpd until March 2018.
Output from Nigeria plummeted to near 30-year low of around 1.2 million bpd in 2016 from 2.2 million bpd previously, as attacks on oil facilities in the Niger Delta rose at an alarming pace due to resurgence of militancy.
Already, local crude oil production in May jumped to 1.73 million bpd, up by 80,000 bpd from April, its highest level since March 2016, according to the most recent S&P Global Platts OPEC survey.
Besides, with the incoming of Forcados line, production has boosted flows and production is expected to increase even further this summer, according to recent loading prospects.
This means that with output of crude and condensate now near its full capacity of 2.2 million bpd, Nigeria, which is exempted from the current OPEC cuts, could be asked to join the deal if the recovery continues.
Earlier in May, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, acknowledged that Nigeria had a “responsibility” to join in the OPEC-led output cuts should its crude production returned to 1.8 million bpd.
Now, with Nigeria’s production of condensate averaging around 300,000 to 400,000 bpd, it looks like this milestone might be reached sooner than expected.
Currently, the Head of Commodity Strategy, RBC Capital Markets, Helima Croft, said “If they hit 2.1 or 2.2 (million bpd) and we get through the summer and potential situation with the [president’s] health, and it looks like production is stable, at that point you consider making them make the same level cuts as everybody else,”
Some analysts said that one of OPEC’s mistakes when it granted exemption to Libya and Nigeria was that it failed to outline conditions when the two countries would be brought back, which was “contributing to a credibility gap.”
“The increase in output of both these countries has exceeded expectations among the vast majority. For OPEC not to devise a strategy for this has damaged market sentiment,” a geopolitical analyst at Energy Aspects, Richard Mallinson, said.
However, the calculation regarding the rising output seems to be facing counter as statistics from volume of crude oil produced in Nigeria has been reducing since January this year, leading to a cumulative loss of about N131.8bn, an analysis of various reports from the Nigerian National Petroleum Corporation has shown.
After increasing to 1.84 million barrels per day in January this year, from 1.58mb/d that was recorded in December 2016, the country’s crude production commenced a descent and closed at 1.82mb/d and 1.59mb/d in February and March 2017, respectively.
Figures in four financial and operations monthly reports of the NNPC from January to April 2017 showed that Nigeria’s total volume of crude and condensate lifting and utilisation dropped by 3.55 million barrels between January and March this year.
The corporation put the value of this drop at $431m or N131.8bn, using the official exchange rate of N305.85 to a dollar.
