Analysts at the research arm of Goldman Sachs, an investment firm based in the United States have said that OPEC supply caps would need to be supported by sustained inventory draws and US rig count decline for prices to rally above $47/bbl.
The 14-member cartel are making moves to cap Nigeria and Libya’s output as rising production from these countries threaten efforts to curb a supply glut that has seen prices fall to levels before the agreement was reached in November last year.
However, in a note obtained by BusinessDay yesterday, GS Research team believe more would be required.
“Given the recent rebound in net speculative length from the 18-month lows, GSR believe, however, that a failure for these shifts (US rig count decline and OPEC actions) to materialise soon could push prices below $40/bb as the market tests OPEC’s and shale’s reaction functions,” states the document.
In line with this view, Nordine Ait-Laoussine, president of Geneva-based consultants Naicosa and former energy minister of Algeria said that a proposal that Libya and Nigeria could have to accept limits on their crude production probably wouldn’t be enough to put OPEC’s faltering efforts to eliminate a global supply glut back on track.
Production recoveries from Nigeria and Libya have added enough supply within the last two months to offset Saudi Arabia’s cut.
Ait-Laoussine said that should the pair accept a cap at their desired levels of output, OPEC and its allies led by Russia would still have to adjust their own quotas to compensate for the increase.
Austin Avuru, MD/CEO of Seplat Production Development Company in a chat with journalists after a round table forum to discuss the future of Independents in Nigeria, organised by Aspen Energy in Lagos, yesterday, said that the cap if they were indeed installed would not have much impact on local production.
“When we were doing 1.3million bpd because of constraints in the Niger Delta, we were not part of the cuts understandably so if we are back to full production, then they would have to look at what our full potential is, what it would have been if they cut it and put a cap there. I still think that we won’t go lower than 2.2 million barrels which is about our capacity as a country anyway,” said Avuru.
However, this does not indicate that bearish oil prices would not have effect in Nigeria. The 2017 budget was has benchmarked on oil prices selling at $44/bbl hence lower oil prices could negatively impact income estimates planned for infrastructural projects and bloated government bureaucracy.