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Nigeria’s Oil Fields Face Shutdown Amid Price Slump

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With crude oil trading around $30 per barrel in the international market from a peak of $114 in June 2014, production from Nigeria now faces a decline as some fields face an imminent shutdown if the low oil price persists.

Industry players say operating some of the fields in the country is becoming uneconomic, with the selling price of oil being driven down close to the production cost level.

The price of the Nigerian crude oil, Bonny Light, has fallen to $29.47 per barrel, according to the latest data obtained from the Central Bank of Nigeria.

“When oil price drops, we are all in serious trouble, because if the oil price and your unit operating cost are almost the same, it means that when you sell the oil, there is little profit or you are at a loss. Many companies are not far from there,” the Project Director for the Uquo gas field development, a joint venture project by Frontier Oil Limited and Seven Energy, Alhaji Abdullahi Bukar, told our correspondent.

“The unit technical cost of many of our producers is not far from $30 per barrel. So many companies are in trouble,” he added.

According to Bukar, the average production cost for many of the fields in the country is $24 to $25 per barrel.

“For some fields, the production cost is well above $25, maybe $28. For some fields, it is well below $20 and $25. Many of the older fields, which are mostly with the International Oil Companies, have got high production costs,” he said.

Global financial services firm, Morgan Stanley, on Monday joined banks such as Goldman Sachs, City Group and Bank of America Merrill Lynch, in warning that prices could slide to $20 per barrel.

Bukar said, “The production in Nigeria is going to suffer. In the last five years, we have not invested as much as we should to develop additional reserves. Once, we keep going like that, whether there is price change or not, the amount of oil Nigeria is going to be producing will go down.

“When the price drops as low as $20-$30 range, people who have got those old fields or fields where oil production cost is above the selling price will shut them down. There is no point in producing oil to sell at a loss.”

Nigeria, Africa’s top oil producer, relies on crude oil for most of its export earnings and government revenue. Oil production in the country has continued to hover between 1.9 million barrels per day and 2.3 million bpd in recent years.

President Muhammadu Buhari had projected crude oil production of 2.2 million bpd for this year’s budget, down from 2.2782 million bpd in the 2015 budget, with oil-related revenues expected to contribute N820bn.

Industry experts also say the continued decline in global oil prices would stall a number of deep-water projects in the country.

The Chief Executive Officer, Petrosystem Nigeria Limited, Mr. Adeola Elliott, said, “Obviously, the plunging price will affect investment in new fields. I had a discussion with a top official in one of the IOCs operating in the country. What they have done now is to just keep maintaining the facility they have now and producing what they producing now. There is no more new investment.”

Prior to the drop in prices, several IOCs had in recent times shifted more of their focus to the offshore areas of the Nigerian oil industry as a result of onshore risks, with a number of planned deep-water projects expected to come on stream in the coming years.

Deep-water oil projects that have yet to achieve Final Investment Decision include Bonga Southwest and Aparo (Shell); Zabazaba-Etan (Eni); Bosi, Satellite Field Development Phase 2 and Uge (ExxonMobil); and Nsiko (Chevron).

An energy expert and Technical Director, Drilling Services, Template Design Limited, Mr. Bala Zakka, said with oil at $30 per barrel, the profits and projects, including Corporate Social Responsibility activities of many oil firms would be negatively affected.

“Major deep-water projects will be affected because they are very expensive. If oil continues to fall, a lot of exploration and drilling campaigns will reduce. A lot of marginal field operators will not be able to drill new wells. There is every possibility that companies will retrench to be able to stay afloat,” he said.

The Head, Energy Research, Ecobank Capital, Mr. Dolapo Oni, said, “Our production is really having issues, and I think it might be worse in 2016. Our production is likely to reduce this year.

“There are not as many fields likely to come on stream this year. Most companies just want to focus on their existing production. So, it is possible we won’t see as much new production come on stream to reverse the trend of decline in major fields we have. That might make production go down.”

Oil prices could reach as low as $10, Standard Chartered warned, stating, “Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets.”

Wood Mackenzie, the energy consultancy firm, said in a report last week that since the oil price collapse in 2014, 68 major upstream projects containing 27 billion barrels of oil equivalent had been deferred.

This, it said, amounted to $380bn of capital expenditure deferred by total project spend in real terms.

It stated, “As oil prices continue to fall and capital allocation tightens, we expect the list will grow further. The level of production impacted by these deferrals is material in a global context.

“The FIDs on many of these projects have been pushed back to 2017 or beyond. Deep-water is hit the hardest. Over the next five years, $170bn of potential investment currently hangs in the balance across these 68 projects.”

Wood Mackenzie says, in all, some 27 billion barrels of oil equivalent in reserves, or 2.9 million barrels per day of liquids production, will not come on stream until early in the next decade, later than envisaged.

High cost deep-water fields, particularly those in Angola, Nigeria and the Gulf of Mexico, requiring heavy upfront investment, account for more than half of that deferred production.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Another Turbulent Day

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Inflation Hits 40-Year High

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Further Pressure on Central Banks

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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