Except President Muhammadu Buhari’s administration acts fast, the 2018 budget currently under legislative scrutiny in the National Assembly would hit the rocks.
The Organisation of Petroleum Exporting Countries (OPEC) is bracing for a production quota on Nigeria. The oil cartel is in agreement with Russia to extend self imposed curbs in production to the end of 2018.
Since OPEC imposed production quotas a year ago to shore up prices, Nigeria, for reasons associated with militant activities in the Niger Delta that restricted oil output, was exempted from the cuts.
There were indications last Thursday that OPEC and other oil-producing states could set quotas on oil production for Nigeria at 1.8 million barrels per day and for Libya which was also exempted on account of the civil war in the country, at one million barrels per day.
At the moment, Nigeria has been producing about 1.9 million barrels per day. But Buhari had set a production target of 2.3 million barrels per day and a price of $45 per barrel to fund its over N8.612 trillion budget estimate for 2018.
Iran’s Oil Minister announced Nigeria and Libya would be included in the oil output deal and an OPEC communique stated the countries would not produce above 2017 levels in the new year. The minister, Mohammed Rumhi, said on Thursday that Nigeria had agreed to cap output at 1.8 million barrels per day, adding that OPEC members are convinced Nigeria should now share in the burden of stabilising global oil prices alongside other members as well as some major non-OPEC oil producers after being exempted about a year.
The current deal from OPEC and other producers such as Russia cuts 1.8 million bpd from the market in an attempt to tackle global oversupply and bolster prices. The deal had been set to expire in March, but on Thursday the Saudi Energy Minister Khalid al-Falih told reporters the cuts would continue for an additional nine months.
It is not certain how Abuja agreed to production that is even less than the current level of 1.9mbpd while it has just unveiled a 2018 budgetary plan based on 2.3mbpd estimate. But there are worries in the financial circles and the energy industry with experts wondering the federal government could be beating discordant tunes in so shut a period.
“It is either this government is playing politics with something as critical as the budget or gross incompetence is at play here. Which ever way, I am inclined to align with the Senate which had very uncomplimentary words in describing the parameters for the 2018 budget,” a financial analyst told Business and Maritime West Africa on Thursday.
“Given this very fundamental distortion on the basis for the budget, the right and proper thing to do is the presidency to withdraw the budget proposal from the National Assembly and get to work using emerging parameters. But it is difficult to believe that all the retinue of technocrats could not anticipate the sentiments of fellow OPEC members.
“It is not like the development caught Nigeria unawares. It has been on the public domain that the concession on production cuts given to Nigeria, Iraq and Libya for special reasons w ill be withdrawn as soon as the market shows signs of stabilising. For the federal government to have become so illusory to project a production level of 2.3mbpd for 2018 is unthinkable,” a banker said Thursday.
“If the government insists on retaining these unsustainable parameters, the option is for it to withdraw Nigeria’s membership of OPEC and produce as much oil as it wants. But then, there is the inevitable effect of a significant drop in oil price. The effect will be far too devastating on Nigeria than other oil producers,” the banker stated.
Oil rose on Thursday after OPEC and non-OPEC producers led by Russia agreed to extend output cuts until the end of 2018, while also signaling a possible early exit from the deal if the market overheats.
“OPEC extending the output cut till the end of 2018 was widely anticipated; however, suggestions that both Nigeria and Libya have decided to cap production is a bullish signal,” said Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics.
However, price reactions were mostly muted, with many analysts saying the nine-month extension was already priced in.
“Because they’re going to be meeting again in a few months, we’re just going to be doing this again,” said John Macaluso, an analyst at Tyche Capital Advisors.
Brent crude futures settled up 46 cents or 0.7 percent to $63.57 a barrel. U.S. crude futures settled up 10 cents or 0.2 percent to $57.40 a barrel. Brent rose 3.5 percent on the month, with U.S. crude rising 5.5 percent.
The most active February Brent contract which expired on Thursday, settled up 10 cents to $62.63.
Saudi oil minister Khalid al-Falih said it was premature to talk about exiting the cuts at least for a couple of quarters as the world was entering a season of low winter demand. He added OPEC would examine progress at its next regular meeting in June.
“It’s not surprising that they gave themselves an out,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, referring to the June meeting and review. He said the important question is country-level compliance. “I think that’s where market attention will focus, because you’re trying to get a market into balance,” Haworth said.
Market watchers said they would look closely at output from countries like Iran, Libya and Russia.
“It will be hard to keep the Russian oil companies in the fold, if shale producers continue to make increased sales to Asia as well,” said John Kilduff, partner at Again Capital.
Russia’s Energy Minister Alexander Novak said he sees his country’s production flat at 547 million tonnes in 2018 if the output cuts are maintained for the whole year.
One of OPEC’s biggest problems while cutting supplies has been rising U.S. output, which is gaining global market share and undermining the group’s efforts to tighten the market.
U.S. oil production hit a new record of 9.68 million bpd last week, according to government data released on Wednesday.
That is up from 8.5 million bpd at the end of last year, before the cuts were implemented. “If producers in the U.S. increase their rig count over the next few months due to higher prices then I expect another price collapse by the end of 2018,” said Scott Sheffield, executive chairman of Pioneer Natural Resources, one of the largest producers in the Permian, the biggest U.S. oilfield.