The good tidings from OPEC

The prediction by analysts that following the cut in crude oil production by the Organisation of Petroleum Exporting Countries and others (OPEC+) analysts Brent prices could hit $100 by the end of this year as the new 1 million barrels a day (bpd) production cut Saudi Arabia announced on recently could further tighten the oil market is quite cheering for Nigeria’s economy.

OPEC+ producers decided to keep the current cuts until the end of 2024, while OPEC’s top producer and the world’s largest crude oil exporter, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July, to around 9 million bpd. The Saudi cut could be extended beyond July, Saudi Energy Minister Prince Abdulaziz said on Sunday, describing the announced reduction as a “Saudi lollipop.”

“With Saudi Arabia protecting oil prices from sliding too low by cutting production, we think oil markets are now more prone to a shortfall later this year,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note carried by Reuters. Even if China’s oil demand is not as strong in the second half of this year as expected, Brent Crude futures are set to rise to $85 per barrel by the fourth quarter of 2023, Dhar added.

Early on Monday in Europe, Brent Crude traded at $77 per barrel, up by 1 per cent on the day. ANZ analysts Daniel Hynes and Soni Kumari reiterated their $100 per barrel Brent target for the end of the year, saying that “Investors are likely to add bullish bets, comfortable that Saudi Arabia and OPEC will provide a backstop should the market hit any hurdles.”

Goldman Sachs, which sees Brent at $95 per barrel in December, described OPEC+’s meeting as “moderately bullish” to its forecast and offsetting some bearish downside risks such as higher supply from sanctioned Russia, Iran, and Venezuela and weaker-than-thought Chinese demand.

Meanwhile, Saudi Energy Minister Prince Abdulaziz bin Salman defended the voluntary output cuts announced by some allied oil producers in April, which he noted were first criticized as likely to spike crude prices then, as failing to support them.

Earlier this year, several producers of the organisation of the Petroleum Exporting Countries and its partners collectively known as OPEC+ revealed a combined 1.66 million barrels per day of production declines until the end of this year. This Sunday, they extended these measures through the end of 2024, with Riyadh announcing an additional 1 million-per-day voluntary and extensible drop, starting in July.

The OPEC+ group otherwise collectively decided to stick to its targets for 2023, with production at 40.463 million barrels per day next year. The news comes after months of macro-economic concerns including the collapse of several U.S. and European banks, a potential global recession, and a slower-than-expected recovery of Chinese demand weighed on oil prices in the first few months of the year.

But the Saudi oil minister defended the voluntary moves as precautionary. “It was just our sensibility, if you will call it, that the environment was not sufficiently allowing confidence to be there. So taking a precautionary measure tends to put you on the safe side and it is part of the typical rhythm that we have installed in OPEC, which is being proactive, being preemptive,” Abdulaziz told CNBC’s Dan Murphy.

“That tool is with us. It doesn’t mean we have certainty that things will go sour or left or right.”

He noted that critics of the April voluntary cuts had accused OPEC+ of seeking to increase prices which would in turn stoke inflation — and then later “pedaled back again and said OPEC+ action failed to [rise] prices.” Abdulaziz also said he thinks the long-term framework changes agreed at Sunday’s OPEC+ meeting will lead to fairer quota-setting among producers who have increased or depleted their spare capacity.

OPEC+ now intends to have three independent analysts IHS, Wood Mackenzie and Rystad Energy study the individual capacity of each OPEC+ member, with an eye to inform their baselines — the starting level from which producers cut their output.

“Hopefully by mid-year next year, we will have new baselines and a way forward that makes it more equitable, more fair for everybody to assign for them production levels that are going to be commensurate with their capacities in the most transparent way,” the energy minister said.

Asked if the group can trust ally Russia, whose export levels have been opaque since the implementation of Western crude and oil product sanctions, Abdulaziz added: “Absolutely. But I always like [the] President [Ronald] Reagan line, ‘Trust but verify,’” noting the instrumental role of independent sources in assessing production.

Although the rise in crude oil price should be good development for Nigerians, whose economy is largely dependent on oil revenue, this has not been the case as the country also depends on imported petroleum products for its domestic use. The implication of Nigeria’s importation of refined petroleum products is that the citizenry will buy fuel at prohibitive cost, given the recent removal of petroleum subsidy by the President Bola Tinubu government. It is, however, our hope and conviction that when the Dangote Refinery comes on stream, and the resumption of some of the nation’s moribund refineries located in Kaduna, Port Harcourt, Warri and Eleme the paradox will be resolved.