Rising Nigeria oil output double-edged sword for economy

There were hi fives by Nigerian government officials recently when a previously sabotaged oil pipeline came back on stream with the prospect of adding some 250,000 barrels per day of shut in production back into oil global markets.

While increased oil production is seen as one of the means of getting the Organisation of Petroleum Exporting Countries (OPEC) member out of recession, cheering Nigeria’s rising output may be a bit premature as oil prices entered a bear market last week, due to a sustained global glut.
Oil prices are now back below where they were when OPEC first struck its historic deal last year.
Analysts say that if Libya and Nigeria — OPEC members exempt from the curbs — and U.S. shale producers continue to pump crude at record levels, it will undermine efforts to suck up a global glut and bring the markets back into equilibrium.
For Nigeria, which is struggling to maintain a stable exchange rate and fill a huge hole in its Federal budget and finances, rising oil production is a double edged sword.
Nigeria’s distributable government revenues of N462.4 billion ($1.43 billion) in May were affected by a “slight drop in the average price of crude oil from $55.38 to $55.18 per barrel,” said a statement issued by the accountant general.
Nigeria, which is in a recession largely caused by the fall in global crude prices since mid-2014 relies on crude oil sales for two-thirds of its government revenue and 95 percent of dollar earnings.
Attacks on energy facilities that cut oil production have halted since the start of the year with talks between the government and Delta community leaders to address the grievances of militants who want the oil hub to receive a greater share of the country’s energy wealth. While pushing more crude volumes is a positive, it is being negated by the increased oil glut and lower oil prices.
Oil entered a bear market this week and analysts see OPEC being unable to push prices higher in the near term. Lower oil prices will affect Nigeria’s 2017 budget which is predicated on a benchmark of $44.5 per barrel, while the Central Banks ability to defend the currency is also in doubt with lower oil prices. Nigeria’s economy contracted by 1.5 percent in 2016, the first negative growth rate since 1991.
Over the past two years, dollar usage in the economy has almost halved, with Nigeria’s non-oil sectors struggling to adjust to limited dollar liquidity, according to Moody’s Investors Service.
Moody’s estimates that combined capital controls implemented since January 2016 have removed at least $10-15 billion of dollar usage annually from the economy. In the first quarter of 2017, the CBN began to increase the availability of foreign exchange through two new exchange rate windows and interventions in the interbank market. “Central bank policies have helped to ensure the improved foreign exchange earnings have been distributed into the wider economy, but it is highly unlikely that the CBN would pursue these policies if the fundamentals were not supportive of them,” said Aurélien Mali, a Moody’s Vice President and Senior Credit Officer.
The CBN’s gross foreign-exchange reserves have fallen by about $700 million since early May, 2017 to $30.2 billion on June 21. U.S., crude oil production led by rising shale output, rose last week to 9.35 million barrels a day, the highest level since August 2015, according to data from the Energy Information Administration.
A committee of OPEC and non-OPEC members meeting in Vienna last week is reported to have wrestled with the issues of increasing production in Libya and Nigeria, along with soaring U.S. output.
“Further curbs could be necessary, but reaching a consensus will be difficult,” Iran’s Oil Minister Bijan Namdar Zanganeh, said Wednesday on state radio.
In Nigeria, a major export terminal Forcados restarted after a 15-month halt caused by sabotage and will ship about 250,000 barrels a day this month.
West Texas Intermediate crude, the U.S. benchmark, was 4.6 percent lower on the week at $42.69 a barrel at 8:06 a.m. London time, the fifth consecutive weekly drop.
Brent for August settlement climbed 40 cents to end the session at $45.22 a barrel on the London-based ICE Futures Europe exchange. The global benchmark closed at its lowest since Nov. 14., also entering a bear market.
OPEC’s ability to negotiate further curbs to production is complicated by Qatar being under a regional blockade imposed by Saudi Arabia as a punishment for its ties to Iran.