The newly announced OPEC+ oil cuts came earlier than expected, surprising many on how the cuts will affect the global oil market and Nigerian oil revenue.
The Organisation of the Petroleum Exporting Countries with Russia and other allies known as OPEC+, on Sunday, took the world by surprise with the announcement of further cuts of 1.16 million barrels per day from their oil production.
Although OPEC+ says the cuts were aimed at supporting market stability, the market describes this as a surprise move, especially because the development comes a day before a virtual meeting of the OPEC+ ministerial panel, which includes Saudi Arabia and Russia. The oil cartel and its allies were expected to stick to 2 million bpd of cuts already in place until the end of 2023. The latest cuts will start in May.
Immediately after the cuts were announced, oil prices shot up to above $86 per barrel.
Prices last month fell towards $70 a barrel, the lowest in 15 months, on concern that a global banking crisis would hit demand.
Still, further action by OPEC+ to support the market was not expected after sources downplayed this prospect and crude recovered towards $80.
Analysts have stated that although the latest cut may not have a significant impact on Nigeria’s oil output, the attendant rise in prices may shore up government revenue, which had witnessed a major dip in recent times.
“It will affect us positively because we have seen an increase in price. On the other hand, it does not affect us because we have not been meeting our OPEC quota,” Managing Director of Enterprise Capital Partners Ltd, Rotimi Fakayejo, told The PUNCH.
In the same vein, the National Controller Operations of the Independent Petroleum Marketers Association of Nigeria, Mike Osatuyi, said the cuts will spell good for the Nigerian economy.
“Before the cuts, prices were around $65 per barrel. But now that they are cutting further, prices will shoot further to around $85 per barrel. So, Nigeria will make more money than it used to make from its crude oil exports,” he explained in a chat with The PUNCH.
Meanwhile, Sunday’s pledges bring the total volume of cuts by the Group to 3.66 million bpd according to Reuters calculations, equal to 3.7 per cent of global demand.
Last October, OPEC+ had agreed to an output cut of 2 million bpd from November until the end of the year, a move that angered Washington as tighter supply boosts oil prices.
The U.S. argued that the world needed lower prices to support economic growth and prevent Russian President Vladimir Putin from earning more revenue to fund the Ukraine war.
Saudi Arabia said it would cut output by 500,000 bpd while Iraq will reduce its production by 211,000 bpd, according to official statements.
The UAE said it would cut production by 144,000 bpd, Kuwait announced a cut of 128,000 bpd while Oman announced a cut of 40,000 bpd and Algeria said it would cut its output by 48,000 bpd. Kazakhstan will also cut output by 78,000 bpd.
Russia’s Deputy Prime Minister Alexander Novak also said on Sunday that Moscow would extend a voluntary cut of 500,000 bpd until the end of 2023. Moscow announced those cuts unilaterally in February following the introduction of Western price caps.
After Russia’s unilateral reductions, U.S. officials said its alliance with other OPEC members was weakening, but Sunday’s move showed the cooperation was still strong.
The Saudi energy ministry said in a statement that the kingdom’s voluntary cut was a precautionary measure aimed at supporting the stability of the oil market.
A statement released by OPEC’s 48th Meeting of the Joint Ministerial Monitoring Committee after the cuts said the Committee reviewed the crude oil production data for the months of January and February 2023 and noted the overall conformity for participating OPEC and non-OPEC countries of the Declaration of Cooperation.
The statement said members of the JMMC reaffirmed their commitment to the Declaration of Cooperation, which extends to the end of 2023 as decided at the 33rd OPEC and non-OPEC Ministerial Meeting on October 5, 2022. All participating countries were urged to achieve full conformity and adhere to the compensation mechanism.
The meeting noted the following voluntary production adjustment announced on April 2, 2023, by Saudi Arabia (500 thousand b/d); Iraq (211 thousand b/d); United Arab Emirates (144 thousand b/d); Kuwait (128,000 b/d); Kazakhstan (78,000 b/d); Algeria (48, b/d); Oman (40 thousand b/d); and Gabon (8 thousand b/d) starting May until the end of 2023, will be in addition to the production adjustments decided at the 33rd OPEC and non-OPEC Ministerial Meeting.
The above will be in addition to the announced voluntary adjustment by the Russian Federation of 500 thousand barrels per day until the end of 2023, which will be from the average production levels as assessed by the secondary sources for the month of February 2023.
Accordingly, this will bring the total additional voluntary production adjustments by the above-mentioned countries to 1.66 million b/d.
Following the cuts, Goldman Sachs predicted that crude oil production cuts by OPEC could result in a significantly larger deficit in the market, driving a rally in prices to $100 per barrel by April 2024, and raising the group’s pricing power.
Goldman said it sees “elevated OPEC pricing power – the ability to raise prices without significantly hurting its demand – as the key economic driver”, and estimates that the production cut will raise OPEC+ revenues as the boost to prices more than offsets the drop in volumes.
Goldman also said it expects a nearly 90 per cent implementation rate for the 1.16 million bpd production cut plan, reasoning that countries that announced an additional cut have a strong compliance track record, and had implemented nearly 90 per cent of the October 2022 cut by January 2023.
The investment firm further reiterated that the market will return to sustained deficits from June onward given rapid emerging market growth, falling Russian supply, and sluggish U.S. supply.
This comes on the heels of Nigeria’s crude oil production for March 2023 edging up to 1.6 million barrels per day, which was the country’s target for the first quarter of 2023. It contributed significantly to the 28.90 mbpd pumped by OPEC output.
Nigeria’s output for January was 1.25mbp and 1.3mbp for February, even as the volume produced for March came close to 1.6mbp, according to a Reuters survey tracked supply to the market, based on shipping data provided by external sources, Refinitiv Eikon flows data, information from companies that track flows such as Petro-Logistics and Kpler, and information provided by sources at oil companies, OPEC, and consultants.
Meanwhile, Minister of Finance, Budget, and National Planning, Zainab Ahmed, in December 2022, during the World Bank’s Nigeria Development Update and Country Economic Memorandum in Abuja, said the country set its sight on the country’s crude oil production to reach 1.6mbpd by the first quarter of 2023, due to efforts intensify to improve oil production infrastructure and reduce oil theft.
Ahmed’s statement on Nigeria reaching the crude oil production target of 1.6mb/d in Q1 2023, confirms The PUNCH’s fact check report late last year on the true state of the country’s crude oil production.
Chief Upstream Investment Officer, NNPCL Upstream Investment Management Services, Bala Wunti, said in early December at the 11th Practical Nigerian Content forum in Uyo, Akwa-Ibom State that the country’s dwindling oil production that dropped to a record low, 937, 000b/d last September, was back up to about 1.6mb/d as of December.
He maintained that the output increase was a result of the government’s rectangular approach to the fight against crude oil theft.
“Crude theft affects all architecture that funds the country. When the oil theft reached its peak, everything including gas production was affected,” he said.
According to him, the government adopted different strategies to tackle the challenge of oil theft, which have bolstered the country’s oil out.
“In all, these efforts were able to do three things; detect, deter and respond appropriately. As of today, oil production is at 1.59 million barrels per day,” he said.
However, checks by The PUNCH on data from the Organisation of the Petroleum Exporting Countries Monthly Oil Report for December showed that the country’s oil output was around 1.1mb/d.
Nigeria as a long-standing member of OPEC had been unable to meet its OPEC quota for some years due to low production.
However, the country’s production is now up to 1.6mb/d, which has contributed significantly to the 28.90 mbpd produced by OPEC for the month of March.
Although OPEC did not state a new cut quota for Nigeria, however, the currently running quota puts Nigeria’s current expected production at 1.8mb/d.
A leap in production by 300, 000b/d in March, means the country’s production in the month under review had shot up by 9.3 million barrels. Total production for the month was 49, 600, 000 barrels.
While Brent price was $77 per barrel, Nigeria’s Bonny Light was sold for $78 in March. This means the country had raked in an extra N337bn in the month. This means that the country would have raked in about N1.8tn from crude oil export in March.
Experts have argued that Africa, Nigeria inclusive needs to diversify its economy away from oil and gas.
Professor of Economics and Public Policy at the University of Uyo, Akwa Ibom State, Akpan Ekpo, told The PUNCH in an interview that Nigeria should not rely on oil revenue, despite crude oil retaining 80 per cent of the country’s total export.
“Oil prices are volatile, and we need to think of other ways to boost revenue,” he said.
