A new Charter of Cooperation among the Organisation of Petroleum Exporting Countries and 11 non-member oil producing nations (OPEC+) may create a new window of opportunity for Nigeria amid concerns that the cartel’s influence in the global oil market is waning.
Khalid Al-Falih, Saudi oil minister, was reported to have said that OPEC has agreed on a draft cooperation charter with the OPEC+ and is still working on which inventory metric to be used in the charter. The oil cartel had sought the buy-in of other big non-OPEC member countries, such as Russia, the world’s third-largest oil producer after the United States of America and Saudi Arabia. This was intended to stabilise the global oil market by cutting production.
The charter “has created one of history’s strongest producer partnerships, spanning the entire world from east to west”, Al-Falih said Tuesday. “Our objectives related to market stability are now matched by the horsepower needed to deliver them,” he said.
Since the initial production cuts were agreed upon in late 2016, non-OPEC members like Russia have bolstered the Organisation’s ability to influence the global oil market. While OPEC controls less than 50 percent of the world’s crude oil production, the expanded coalition, known as OPEC+, controls a majority.
On July 1, OPEC and other allied major oil producers agreed to extend crude oil production cuts for nine months, a move designed to keep oil prices from falling as the US production increases and concerns grow about global demand.
For Nigeria with economic fortunes tied to movements in oil prices, higher oil prices are a boon. This is so because Nigeria earns 95 percent of its dollars from selling crude oil. Anytime oil prices fall, they impact Nigeria’s foreign reserves. This is worsened because the Central Bank of Nigeria (CBN) operates a managed floating currency rate and sells dollars in the open market frequently, taken from the foreign reserves.
A foreign reserve is money or other assets held by a central bank or other monetary authority to pay its liabilities if needed, such as the currency issued by the central bank.
“A flexible exchange rate would not favour the poor. I am committed to protecting the naira. We cannot allow the naira to float freely,” Godwin Emefiele, CBN governor, said last month at an event in Lagos.
Nigeria’s economic growth slowed in the first quarter of 2019 after the oil sector, the country’s biggest foreign-exchange earner, contracted.
When oil prices found a floor around $40 in the first quarter of 2016, the Nigerian economy slid into a recession and the CBN began restricting scarce forex for what it considered important items and began to artificially prop the naira to maintain the exchange rate stability. The long-term effect of these controls is an economy with a weak growth.
“If the oil price falls below $50 a barrel, Nigeria will not be able to balance its books. We have to contend with negative volume variance,” said Johnson Chukwu, managing director and CEO, Cowry Assets Management Ltd.
According to Bloomberg’s market data, Brent crude, the international benchmark for crude prices sold for $63.77 per barrel down by -0.05 and -0.08 percent on Thursday by 1:11 pm local time. The West Texas Intermediate was $57.05 per barrel down by -0.29 and -0.51 percent.
In the third quarter, WTI crude is set to form a solid base to launch another attempt at the $65 per barrel mark provided the global demand outlook does not deteriorate any further.
“The downside for oil appears to have been estimated to be around the mid-$50 per barrel range by the recent announcement of revived US-China trade talks, staving off the risk of an immediate deterioration in ties between the world’s two largest economies,” Han Tan, who is a market analyst at forex-broking firm FXTM, said in a note to BusinessDay, Thursday.
The OPEC+ new Charter of Cooperation is sending out strong signals the oil cartel is determined to maintain market stability and shore up oil prices, an opportunity Nigeria needs to seize to rake in more oil revenue and use this to fund infrastructure, education, healthcare and other social amenities.
This is a window of opportunity in the sense that OPEC used to shift world oil markets with a single announcement. These days, the Saudi-led organisation needs help from some key partners, most significantly Russia, to exert that kind of influence. There are no guarantees about how long the new Charter of Cooperation’s influence will last and keep the oil market stable as it shores up prices.
Again, Nigeria needs proper legislation, security in the northern parts of the country, competitive cost of operations, standardisation of products and high-yield seedlings to take advantage of large export markets for agricultural products such as China. Last month, Namibia made history as the first African country to export beef into China and Nigeria has only to create an enabling environment for export of agricultural products to thrive. There is an urgent need to boost activities in Nigeria’s manufacturing and export-oriented sectors to meet international standards in order to avert Africa’s biggest oil producer’s economy coming down whenever the new Charter of Cooperation’s influence starts to wane, analysts say.
STEPHEN ONYEKWELU
