Talking Point of 2014: Dwindling oil price

As 2015 begins in earnest, the biggest talking point of the industry for 2014 is the decline in the price of crude oil.

Oil price has fallen by almost 50 percent since June 2014 from around $115 a barrel to less than $60 after nearly five years of stability. The oil price is partly determined by actual supply and demand, and partly by expectation. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. OPEC led by the Saudi Arabia has decided not to sacrifice their market share to restore the price.

Non-OPEC oil supply grew by estimated 1.72 million barrels per day (mb/d) in 2014 to average 55.95 mb/d. Strong estimates for both the US and Canada constitute the main factor behind expected supply growth. OECD Americas’ oil production estimates increased by about 1.54 mb/d in 2014 to average 19.67 mb/d, the highest among all non-OPEC regions. Russia’s oil supply estimates increased by 0.05 mb/d in 2014 to average 10.56 mb/d.

OPEC loosing relevance?

OPEC is pointing the finger at speculators as well as Non-OPEC countries, but especially US shale producers for the crude price crash. Gulf oil ministers blamed “irresponsible” non-OPEC producers for the plunge in prices, but voiced confidence markets would rebound.

“One of the main causes is irresponsible production by some producers from outside the organisation,” the UAE Energy Minister Suhail al-Mazrouei said.

Ali al-Naimi Saudi Oil Minister lashed out at non-OPEC members, blaming the global price fall on a “lack of cooperation by main producing countries outside OPEC, misleading information and speculators’ greed”.

Amidst the price crash, Saudi Arabia and Kuwait said they would not cut production even if non-OPEC members reduce their output, while the United Arab Emirates and Iraq shrugged off calls for an emergency meeting of the group.

“If they (non-OPEC countries) want to cut production they are welcome. We are not going to cut, certainly Saudi Arabia is not going to cut,” Ali al-Naimi said. Kuwaiti Oil Minister Ali al-Omair agreed.

“I don’t think we need to cut. We gave a chance to others and they were not willing to do so,” Omair said, in a clear reference to shale and sand oil producers from North America and elsewhere.

Suhail al-Mazrouei was emphatic that OPEC, which pumps a third of global crude supplies, will not make any move soon to shore up the market.

“We will not interfere with market fundamentals and do something that is a short fix,” he said.

OPEC Secretary-General Abdullah al-Badri hoped to see a recovery in the price of oil by the end of the second half of 2015.

“We hope the price would rebound by the end of the second half of 2015,” he said. “We can’t see the market now; we have to wait until the end of the second half of 2015 to see how the market reacts to these low prices.”

Nigeria’s finances falter

Budget presented to the national assembly by Finance Minister Ngozi Okonjo-Iweala reveal that Nigeria slashed its forecast for economic growth in 2015 due to the plunge in global oil prices. The ministry now sees Nigeria’s economy growing 5.5 percent in 2015, down from an earlier projection of 6.4 percent.

Oil accounts for the bulk of government revenue in Nigeria, but global crude prices have almost halved over the last six months. The naira currency has also been devalued.

The 4.3 trillion naira budget is based on a benchmark oil price of $65 a barrel, down from $77.50 for 2014, and a significant cut on previous budgets, Finance Minister Ngozi Okonjo-Iweala said.

Revenue was seen at 3.6 trillion naira. The projected deficit for 2015 was 755 billion naira or 0.79 percent of GDP, low by global standards.

The oil production forecast was set at 2.27 million barrels per day, down slightly from this year’s assumption of 2.38 million.

Oil accounts for about 15 percent of Nigeria’s gross domestic product but it makes up 75-80 percent of government revenues. Government finances have been hammered by the slide in world oil prices since June. Efforts to diversify over the years have had mixed results, and oil dependency is seen as the Nigerian economy’s biggest systemic flaw.

Frank Uzuegbunam