OPEC overcame its internal differences on Wednesday to announce a cut in its production quotas of 1.2 mbpd to 32.5 mbpd with effect from 01 January. The target may prove still more ambitious since several members are known to produce above their allotted quotas. Nigeria is exempted from the cuts because its production is running far behind its own quota due to sabotage in the Niger Delta. Crude prices in New York rose by close to 10% to about US$51/b on news of the first OPEC cut since 2008.
The communique from Vienna noted that certain non-OPEC countries had agreed to reduce their own production by a combined 600,000 b/d. Indeed, Russia subsequently pledged a cut of 300,000 b/d.
We are all familiar with the poor record of OPEC in quota compliance. We also know the historic tensions within the organisation such as Saudi vs Iran, and Iraq vs Iran. Yet we see in the agreement a recognition by Saudi and other low-cost Gulf producers that they cannot drive the shale industry out of business by producing at full capacity.
We also think that the US president-elect, who campaigned on a message of “America first”, will support domestic energy self-sufficiency and therefore incentives for the shale industry.
We are close to surrender on making a call on Nigerian production levels, given the different data sources that are available, and note the opinion of one indigenous producer that output of 2.20 mbpd (the assumption in the 2016 budget) requires new annual investment of US$14bn for five years.
The OPEC announcement should be welcomed by the FGN, which is assuming an average price of US$42.5/b in its provisional 2017 budget.
We see no reason to adjust our end-2016 forecast for spot Bonny Light of US$53/b. The OPEC decision covers six months, extendable for a further six months. Our take is that it has revised its underlying analysis of market dynamics, deciding that many shale producers in the US are here to stay. We may therefore push up a little our forecast of US$60/b for end-2017.
The higher spot price clearly feeds into the costs of importers of petroleum products. The FGN has said several times that it is not incurring any subsidy costs. Yet the devaluation/liberalisation of June has added greatly to importers’ costs and pushed them above the N145/litre ceiling for premium motor spirit set by the regulator. We suspect that the importers, or at least the NNPC, are taking the hit on their books.