The Organisation of Petroleum Exporting Countries (OPEC) yesterday agreed to the first oil production cut in eight years, leading to a price rally that saw oil prices hitting a one-month high of $50 per barrel.
Should oil prices continue to hover at slightly above $50 for a prolonged period, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, said Nigeria would be comfortable with the price.
But the excitement in the country could be blighted by the militancy in the Niger Delta, which has seen Nigeria’s oil output fall below 2 million barrels per day (mpbd) since the beginning of the year.
Production shut-ins caused by the attacks on oil and gas infrastructure have impacted on oil earnings and exacerbated the foreign exchange scarcity in the country.
The production cut of 1.2mbpd by all OPEC members, including arch rivals Saudi Arabia and Iran, was seen as a major achievement by OPEC’s Secretary General, Nigeria’s Mohammad Barkindo, whose diplomatic shuttles since assumption of office in August, led to the “Algiers Accord” that sought to stabilise the market and boost prices.
OPEC President Mohammed Al-Sada, who announced the resolution yesterday at the end of the body’s 171st meeting in Vienna, Austria, said the adjustment in output would be shared among all members of the group, to bring their ceiling to 32.5 million barrels per day.
The cut is subject to a review after six months, with a possible rollover for another six months on the recommendation of a ministerial monitoring committee of three OPEC counties, namely, Kuwait, Venezuela and Algeria. The countries are to closely monitor the implementation and compliance with the agreement.
Signs that the cartel would reach a deal at yesterday’s meeting were evident early in the afternoon when Saudi Arabia’s energy minister, Khalid al-Falih, said the cartel, which controls about a third of the world’s oil production, was moving “close” to a deal, signalling that he was working to bridge a gap with regional rival Iran.
Iran’s oil minister, Bijan Zanganeh, also confirmed that all OPEC members were ready to compromise and that there was a “framework for a deal”.
Financial Times reported that his tone was notably softer than in recent days.
According to the Iran’s oil minister, the cartel was targeting between 1mbpd and 1.2mbpd of cuts between its 14 members.
As the meeting was still ongoing, there appeared to be a consensus to cut production to 32.5mbpd but the exact distribution of the cuts was still being finalised.
Iraq, which has disputed its need to cut production, as the country continues to fight ISIS militants, was expected to block the deal, but it appeared to have yielded ground.
The Wall Street Journal reported that both U.S. and international oil yesterday posted their largest daily gains since February on the news of the output cut, with the Brent benchmark hitting $50 a barrel for the first time in one month.
Brent crude rose 8.6 per cent to $50.62 a barrel in London, while U.S. crude futures gained $3.12, or 6.9 per cent, at $48.35 a barrel on the New York Mercantile Exchange.
According to the report, OPEC reached a deal to cut production by 1.2mbpd from the current 33.6mbpd.
OPEC’s cut would represent a reduction of about 1 per cent of global output.
The breakthrough comes after months of on-and-off-again negotiations that made many traders doubt an agreement could be reached.
The agreement was a stark reversal in strategy from their last big change in November 2014, when the group essentially lifted all output quotas so that its members could compete with a global boom in oil production.
That decision led OPEC to record-high production, adding more supply to an already flooded market and eventually dropping prices below $30 a barrel, so low that many worried it could fuel a global recession.
A deal to cut more than 1mbpd could keep prices steadily above $60 a barrel by the first quarter of 2017, and accelerate the end of a glut that has been slow to come for more than two years after the development of shale drilling and oil-sands production in North America.
However, countries outside OPEC now account for about 58 per cent of the world’s total output, and producers around the world have increased output in recent months.
Global production rose 800,000 barrels a day in October, to 97.8 million barrels, according to the IEA.
Russian oil production has increased by 500,000 barrels a day in September and October, so even if it agrees to freeze output it would do so at record high levels.
In September, OPEC reached a provisional accord in Algiers to bring its total production down to between 32.5mbpd and 33mbpd from a near record 33.8mbpd at the moment.
Saudi Arabia is expected to shoulder the bulk of any production cuts along with its Gulf allies, and Falih yesterday said its oil output would take “a big hit”.
In return, the kingdom has asked Iran to curb output at close to 3.7mbpd.
Before OPEC reached the deal, Falih said he expected Russia and other countries outside the cartel to cut about 600,000bpd of production.
The kingdom believes the co-operation of big producers outside the cartel is necessary for any deal to be effective.
But he also criticised Russia’s public stance that freezing its production, which has climbed to a post Soviet-era high, was acceptable.
Speaking on Bloomberg television yesterday morning before the decision was announced by OPEC on the new output cut, Kachikwu said Nigeria would be quite comfortable with the price of crude oil in the mid-$50s.
He also said he was not sure when the militancy affecting oil and gas production in the Niger Delta would end, even though the federal government was reportedly making some progress at stemming the destruction of oil and gas infrastructure in the region.
Kachikwu said Nigeria would welcome oil prices at between $54 and $56 per barrel, adding that if prices got to $60 a barrel, he would consider it a favour to the country.
“Mid-$50s will be fine, but if we have a Santa Clause day, then $60 per barrel. But frankly, we are looking at mid-$50s,” Kachikwu said in response to a question on what price level Nigeria would consider comfortable.
He also said the issues in the Niger Delta could remain a potential challenge to the success of the government’s recently launched policy reforms for the oil and gas sector.
According to him, other potential challenges were fairly within the control of the government but not the Niger Delta issue.
The minister said despite the progress made so far in attempts to address the Niger Delta militancy, he could not predict an end to the attacks.
“I think the Niger Delta issue is a major problem because you simply can’t get a final handle on it until it is resolved and you will never know when it will be resolved,” he stated.
He further explained: “We have made a lot of progress on that, production is up 1.9mbpd to 1.95mbpd, from the lows of 1.4mbpd. Militancy attacks are less, an average of one every month, as opposed to five to six every week when they first started early in the year.
“We still have sporadic attacks which simply means that we still have not sufficiently addressed all the issues that need to be addressed not just by myself but also the Minister of the Niger Delta and other ministers that are working feverishly to try and get the convergence on some of the models that we are trying to deploy in the Niger Delta.”