Oil prices are now certain to hold above Nigeria’s budget benchmark of US$44.50 as more oil producing countries on Sunday backed a proposal to extend the restrictions on oil output for another six months.
Ministers from OPEC and non-OPEC oil producers met on 26 March and reached an agreement to consider extending by six months a global deal to reduce oil output reached in December 2016.
News agency reports say that five OPEC members and Oman backed an extension, with Kuwait saying it should be for six months but Russia Energy Minister, Alexander Novak, told Bloomberg television that it is too early to talk about an extension and that it won’t make any pledges until April.
The Organisation of the Petroleum Exporting Countries and 11 other leading oil producers including Russia, agreed in December to cut their combined output by almost 1.8 million barrels per day, in the first half of the year.
Any agreement to extend the restriction would have a positive impact on crude oil prices, which had been declining in recent weeks from an average price of US$55, traded for most of this year. Brent Crude closed at US$51 outside trading hours on Sunday, after closing at US$50.60 on Friday.
Nigeria, exempted from cutting crude oil output is expected to benefit from the decision, if it is able to increase its production from the 2016 lows. The country depends on crude oil revenues for about 70 percent of government earnings and more than 90 percent foreign exchange income. The recent surge in crude oil prices and production has helped the country rebuild its dwindling external reserves to more than US$30 billion, strengthening the CBN’s capacity to intervene in the foreign exchange market.
The Federal Government says it needs crude oil revenues to reduce Nigeria’s dependence on crude oil, and crude oil earnings have become even more important, following the contraction in the economy which is expected to impact negatively on non-oil revenues.
Even though higher crude oil prices have resulted in Shale producers in the US raising production and filling the supply gap left by OPEC and non OPEC producers, Ibe Kachikwu, Nigeria’s deputy Minister for Petroleum Resources, recently hinted that oil producers would soon engage with US Shale producers on controlling supply, since it is also in their own interest to keep prices at levels that make crude oil production profitable.
The oil producers, at the end of their meeting on Sunday, were also optimistic that oil prices would rebound later in the year. The ministers explained that factors such as low seasonal demand, refinery maintenance and rising non-OPEC supply had led to an increase in crude oil stocks, which impacted negatively on prices.
“However, the end of the refinery maintenance season and noticeable slowdown in U.S. stock build, as well as the reduction in floating storage, will support the positive efforts undertaken to achieve stability in the market,” the oil producers stated in a press release made available to the media after their meeting on Sunday.
Compliance with the supply-cut deal was 94 percent in February among OPEC and non-OPEC oil producers combined, Russian Energy Minister Alexander Novak, was quoted by Reuters as saying.
Novak also expressed optimism that global oil stockpiles would decrease in the second quarter of this year.
“The dynamics are positive here, I believe,” Novak said, adding that inventories in the United States and other industrialised countries had risen by less than in the past.
Kuwaiti Oil Minister, Essam al-Marzouq said the oil market may return to balance by the third quarter of this year, if producers comply fully with their production targets.
“More has to be done. We need to see comformity across the board. We assured ourselves and the world that we would reach our adjustment to 100 percent conformity,” Marzouq said.