Updated: Kachikwu seeks a global oil cartel to keep crude oil prices high

Nigeria’s Minister of State for Petroleum Resources, Ibe Kachikwu is seeking more active collaboration of crude oil producers globally in a bid to keep crude oil prices high.

Nigeria is highly dependent on crude oil revenues, which best of times make up 70 percent of government revenues and more than 90 percent of export earnings. A higher crude oil price is positive for the Nigerian economy and usually boosts government’s spending capacity, hence Kachikwu’s desire for higher crude oil prices globally.

Kachikwu expressed this desire for global collaboration for higher crude oil prices while speaking in an interview with Bloomberg TV. Kachikwu, who is currently in the US seeking to win more investments from US based International Oil Companies into Nigeria, said he hopes that eventually, OPEC producers will be able to convince shale oil producers in the US to join non-OPEC producers like Russia to mutually agree on production quotas that will sustain current gains in crude oil prices.

“Ultimately, the world will have to be collaborative in this, in firming up this market. The more stable the market is, the better for everybody” Kachikwu said in the Bloomberg TV interview.

Industry analysts have however said that it would be a tall order to see a global agreement on  crude  oil production cut, given  the fact  that companies in places in the United States of America  don’t belong  to any  union or organisation   through which  they could be persuaded  to join  other groups to stabilise the price of oil.

Diran Fawibe, chairman and chief executive officer of International Energy  Services (IES) does not see how  American  companies will team up with   OPEC to cut production.

Speaking in the same vein, Toyin Akinosho, publisher of Africa  Oil and Gas, said most American companies are neck deep into the Shale oil business and that he   does not see them coming on board  to help OPEC and other collaborators  to  cut production, in order to stabilise the price of  crude oil,  having spent so much  money extracting the product.

Companies like ExxonMobil and Conoco have invested so much in Shale Oil and would not want a situation that would not enable them to recoup their investment early enough.

OPEC producers in December reached an agreement to cut crude oil production in a bid to boost crude oil prices which were trading at levels that made it difficult for many OPEC producers to balance their national budgets, since many members of the 11 member OPEC are highly dependent on crude oil revenues.

The cuts which came into effect on January 1, 2017 are expected to lapse at the end of June.

Already many OPEC member countries have expressed support at extending the cuts, which will expire in June. Kuwait, Iraq, Algeria and Angola have all stated that prolonging the production cuts is necessary to rebalance the markets. While global inventories have declined, the total inventory is still about 350 MMBO above the 2010-2014 average.

Since the cuts came into effect, crude oil prices have moved from an average low US$40s to mid US$50s and have been flirting with US$56 in the last week.

“There is a lot of energy around a six-month extension. Clearly, the fluctuating nature of these prices indicates, we have to do some extensions. In terms of if there are going to further cuts, it is not yet discussed. But as I keep saying, there is no way that OPEC can continue to carry this alone.”

But a surge in Shale production in the US is threatening to undo the gains made by OPEC in boosting prices. The March OPEC monthly report shows that US oil rig count has risen by 346 from its lowest point since May 27, 2016, when it was at 316. US crude oil production is now estimated to be in excess of 9.29 million barrels per day and will hit 9.5 million barrels per day by end of the year.

“All the signs of an ever-growing bull market are starting to fade away, (with) Libya and geo-political tensions easing, but also because the Texans are back and they are pumping like there is no tomorrow. If I were OPEC, I would be pretty worried,” said Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai, to Reuters.

Increasingly, the US is also exporting crude oil to other parts of the world ,competing effectively with both OPEC and non-OPEC suppliers. US crude oil exports surpassed 1.2 million barrels a day in February, heading for destinations including Canada, Spain and even China.

OPEC’s supply cuts and more efficient production methods have helped boost US Shale production, which is now threatening OPEC’s desire to see higher crude oil prices.

But analyst say that OPEC’s desire to  bring US shale oil producers into a single cartel to control supply will not work. This is because Shale producers in the US are not state owned companies, as is the case with OPEC and most OPEC members. This means that they cannot be forced to cut production if they desire not to.

Even though OPEC says that they will stick to unilateral cuts, even if they are not able to get US Shale producers to come on board, the increasing efficiency with which US Shale producers are getting shale into the market could undermine any unilateral action OPEC takes and could force them to return to the former strategy of fighting for market share, rather than higher prices.