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Risks to New oil Deal – Kachikwu

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As producers hope to improve the market for oil prices, Emmanuel Ibe Kachikwu, Nigeria’s Minister of State for Petroleum Resources, joins CNBC to look at the risks that could impact recent oil deals.

We talked in the wake of the OPEC deal over a week ago. Now we have a non-OPEC adherence to the deal. How much of a floor under the oil price which is about $50 dollars do you hope to create?
Certainly, the aspiration is to get as close to $60 a barrel as we can. It’s a tall order but I think all the numbers are trending towards that given the fact that we haven’t even started executing the cut itself. This is just the momentum building on the back of the agreement. Everyone is hoping that we can get closer to $60. You want to keep the price within the $60 range. If it gets too high it becomes a problem in its own right.

You gave me a great answer in Vienna about cheating. I very blatantly asked you, “what about the cheating?” People don’t trust the levels historically set by OPEC. You said to me this time it’s different. I wonder if you could just share that because I think one of the big concerns people have would be about adherence to this deal, but you think its different this time.
I think it’s different because in the past you tended to force countries towards a coalition or towards a resolution. This time there’s a major consensus. Everybody’s hurting. Everybody has realised that it needs to be done for most of OPEC and indeed for non-OPEC economies to survive. There hasn’t been too much of beating people into line, it’s been more of a consensual build up. Secondly, there’s a group that has been set up to monitor this. Both the Opec and Non-Opec countries understand that both sides will have to keep to the deal otherwise, it will falter. I think the urgency of now, and the criticality of the economies that they have to protect is enough of an incentive for everyone to be in line this time.

What worries you most about the part of this story that OPEC cannot control. Clearly some non-OPEC countries have signed up to the bill at this point but obviously, there are risks around how the shale producers may ramp up production in the light of a headline oil price increase. Is that the main worry and why the deal is so short or are there other things that concern you?
Certainly, the shale issue is a major one, because if shale begins to mop up production heavily and begins to cut into the share of traditional shares or percentages of most OPEC members you’re going to see some reaction. Secondly, if other non-OPEC countries don’t come on board as rapidly as some have and decide to take advantage of it while continuing to amass their production that could lead to a price fall. Everybody is on the edge. Watching to make sure both sides keep to the deal whether they be OPEC and non-OPEC. Within OPEC we’re also very determined to make sure that we keep to the deal. Saudi Arabia has shown a great sense of leadership and momentum trying to rally everybody back from the initial policy and into a court zone. But like all associations where everything is hinged on perfect delivery, if anyone slips out of the boat they are creating a problem. We’re hoping that at the end of the day people realise that there’s a need to stay on board.

Is it a source of regret for you and for your government that there wasn’t the will or the ability to do this 18 months ago; that the Saudis weren’t prepared to drive this deal back then?
In some sense yes. Nigeria certainly hurt without that oil money so we would have liked to see this come to fruition very early, and I’m sure we would not have gone into recession if we had this deal in play on time. But having said that the reality of the Saudi lesson is that is they didn’t put this on board, if they didn’t drive everyone to understand that OPEC cannot be the can carrying entity, the ability to bring non-OPEC members on board would have been limited. We might have had a short-term loss, but I think in the long term it will be better for everyone that we went through that cycle.

You just made some nice comments about the Saudis then, but do you think there was a real question mark on the relevance of OPEC and that the Saudis have done the right thing by shouldering the weight of these production cuts to get OPEC back into the game, to be seen as relevant to the oil market?
Within OPEC itself we always believed OPEC was relevant, and the fact that the whole world looked to us even though we’re only a 40 per cent producer in the oil market made us always believe we were relevant. Outside of OPEC there were some credibility issues. Would we survive? Would we ever come back together? Would we ever be able to use the cartel power in ways that we did before? And I think Saudi coming back and rallying everyone with some huge numbers helped bring back the credibility and certainly convinced the likes of Russia to come on board.

Can I ask you what happens in six months time because while you have an exception right now there might be pressure if there’s another deal in 6 months time if the market has not been rebalanced for those who had exceptions to be included in a new OPEC deal? How do you feel about that? Do you feel the pressure to get the market right in your own country and be a willing player to cut production in 6 months time?
I think this is just the start of our momentum, and the thing we did in Vienna wasn’t a one-off. We agreed to continue to consult to make this wider body a monitoring instrument. It means that in 6 months time when this should be due for another review, if we feel that the market has not balanced enough, more cuts may be coming. But again that’s going to depend on what has happened in shale production. If within that period we find that what all shale producers have done is simply inch into the market and continue to ramp up volumes then there may be some question marks there.

You flew to Delhi in between these meetings and you signed a memorandum of understanding with the Indians to give them a large percentage of Nigerian production going forward as well. How sensitive are key buyers of your product from China to India to the price of oil at say $58 to $63? You say $60 would be the ideal number for you, but I wonder what that does to lessen the ability of the market to balance itself if it was at $60 rather than at $40.
My experience in India was that the price sensitivity became very high once we began to cross the 60 number. Countries are going to continue to deepen their ability to look for alternatives and look for how to save costs by virtue of limiting their consumption. That’s going to be an on-going thing and OPEC is going to have to deal with in the long term. On the whole I think that everyone realises that for investments to continue in these countries and for oil to even get produced at all. Some sensible number is needed otherwise investments will dry up like they have over the last 18 months. So the deal with India, which we still haven’t signed. We’re just trying to dot our Is and cross our Ts. All we’ve done so far is sign a statement of intent. But, there is a good appetite for Nigerian oil in Asian countries. There is obviously consciousness on the part of Nigeria with the sensitivity of pricing and I think that once we begin to cross the $60 margin, you’re going to begin to see some of the old reactions again.

When is Nigeria going to realise a post-oil strategy which is going to benefit its population?
A lot of things have gone wrong, and a lot of things could have been done better. We’ve lost many years of income that could have been applied to many sectors, so there’s a race against time. We are trying to restructure the economy and move more to agriculture and services. The contribution of those sectors to our GDP is increasing by the day. But the more important thing is that oil got us here positively and negatively and oil is also going to get us out of it so the first discipline that we need to do is clean up our oil sector. We need to make sure that the right incentives are there, eliminate corruption, and begin to grow refineries. Thirty per cent of our foreign exchange burden is on the importation of refined petroleum products and for a country that has produced billions and billions of barrels of oil to not have functional refineries is regrettable, but that’s something that we’re very focusing on right now.

At $60 a barrel, what growth rates do you expect Nigeria to see in 2017?
Well as you know Nigeria has been in recession for the last 6-8 months. If we can round out 2017 with a growth rate of 4-5% I think we will be delighted

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

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Energy

Egypt Increases Fuel Prices by 15% Amid IMF Deal

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Egypt has raised fuel prices by up to 15% as the country looks to cut state subsidies as part of a new agreement with the International Monetary Fund (IMF).

The oil ministry announced increases across a variety of fuel products, including gasoline, diesel, and kerosene.

However, fuel oil used for electricity and food-related industries will remain unaffected to protect essential services.

This decision comes after a pricing committee’s quarterly review, reflecting Egypt’s commitment to align with its financial obligations under the IMF pact.

Egypt is in the midst of recalibrating its economy following a massive $57 billion bailout, orchestrated with the IMF and the United Arab Emirates.

The IMF, which has expanded its support to $8 billion, emphasizes the need for Egypt to replace untargeted fuel subsidies with more focused social spending.

This is seen as a crucial component of a sustainable fiscal strategy aimed at stabilizing the nation’s finances.

Effective immediately, the cost of diesel will increase to 11.5 Egyptian pounds per liter from 10.

Gasoline prices have also risen, with 95, 92, and 80-octane types now costing 15, 13.75, and 12.25 pounds per liter, respectively.

Despite the hikes, Egypt’s fuel prices remain among the lowest globally, trailing only behind nations like Iran and Libya.

The latest increase follows recent adjustments to the price of subsidized bread, another key staple for Egyptians, underscoring the government’s resolve to navigate its economic crisis through tough reforms.

While the rise in fuel costs is expected to impact millions, analysts suggest the inflationary effects might be moderate.

EFG Hermes noted that the gradual removal of subsidies and a potential hike in power tariffs could have a relatively limited impact on overall consumer prices.

They predict that the deceleration in inflation will persist throughout the year.

Egypt’s efforts to manage inflation have shown progress, with headline inflation slowing for the fourth consecutive month in June.

This trend offers a glimmer of hope for the government as it strives to balance economic stability with social welfare.

The IMF and Egyptian officials are scheduled to meet on July 29 for a third review of the loan program. Approval from the IMF board could unlock an additional $820 million tranche, further supporting Egypt’s economic restructuring.

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Crude Oil

Oil Prices Rise on U.S. Inventory Draws Despite Global Demand Worries

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Oil prices gained on Wednesday following the reduction in U.S. crude and fuel inventories.

However, the market remains cautious due to ongoing concerns about weak global demand.

Brent crude oil, against which Nigerian crude oil is priced, increased by 66 cents, or 0.81% to $81.67 a barrel. Similarly, U.S. West Texas Intermediate crude climbed 78 cents, or 1.01%, to $77.74 per barrel.

The U.S. Energy Information Administration (EIA) reported a substantial decline in crude inventories by 3.7 million barrels last week, surpassing analysts’ expectations of a 1.6-million-barrel draw.

Gasoline stocks also fell by 5.6 million barrels, while distillate stockpiles decreased by 2.8 million barrels, contradicting predictions of a 250,000-barrel increase.

Phil Flynn, an analyst at Price Futures Group, described the EIA report as “very bullish,” indicating a potential for future crude draws as demand appears to outpace supply.

Despite these positive inventory trends, the market is still wary of global demand weaknesses. Concerns stem from a lackluster summer driving season in the U.S., which is expected to result in lower second-quarter earnings for refiners.

Also, economic challenges in China, the world’s largest crude importer, and declining oil deliveries to India, the third-largest importer, contribute to the apprehension about global demand.

Wildfires in Canada have further complicated the supply landscape, forcing some producers to cut back on production.

Imperial Oil, for instance, has reduced non-essential staff at its Kearl oil sands site as a precautionary measure.

While prices snapped a three-session losing streak due to the inventory draws and supply risks, the market remains under pressure.

Factors such as ceasefire talks between Israel and Hamas, and China’s economic slowdown, continue to weigh heavily on traders’ minds.

In recent sessions, WTI had fallen 7%, with Brent down nearly 5%, reflecting the volatility and uncertainty gripping the market.

As the industry navigates these complex dynamics, analysts and investors alike are closely monitoring developments that could further impact oil prices.

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Commodities

Economic Strain Halts Nigeria’s Cocoa Industry: From 15 Factories to 5

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Once a bustling sector, Nigeria’s cocoa processing industry has hit a distressing low with operational factories dwindling from 15 to just five.

The cocoa industry, once a vibrant part of Nigeria’s economy, is now struggling to maintain even a fraction of its previous capacity.

The five remaining factories, operating at a combined utilization of merely 20,000 metric tons annually, now run at only 8% of their installed capacity.

This stark reduction from a robust 250,000 metric tons reflects the sector’s profound troubles.

Felix Oladunjoye, chairman of the Cocoa Processors Association of Nigeria (COPAN), voiced his concerns in a recent briefing, calling for an emergency declaration in the sector.

“The challenges are monumental. We need at least five times the working capital we had last year just to secure essential inputs,” Oladunjoye said.

Rising costs, especially in energy, alongside a cumbersome regulatory environment, have compounded the sector’s woes.

Farmers, who previously sold their cocoa beans to processors, now prefer to sell to merchants who offer higher prices.

This shift has further strained the remaining processors, who struggle to compete and maintain operations under the harsh economic conditions.

Also, multiple layers of taxation and high energy costs have rendered processing increasingly unviable.

Adding to the industry’s plight are new export regulations proposed by the National Agency for Food and Drug Administration and Control (NAFDAC).

Oladunjoye criticized these regulations as duplicative and detrimental, predicting they would lead to higher costs and penalties for exporters.

“These regulations will only worsen our situation, leading to more shutdowns and job losses,” he warned.

The cocoa processing sector is not only suffering from internal economic challenges but also from a tough external environment.

Nigerian processors are finding it difficult to compete with their counterparts in Ghana and Ivory Coast, who benefit from lower production costs and more favorable export conditions.

Despite Nigeria’s potential as a top cocoa producer, with a global ranking of the fourth-largest supplier in the 2021/2022 season, the industry is struggling to capitalize on its opportunities.

The decline in processing capacity and the industry’s current state of distress highlight the urgent need for policy interventions and financial support.

The government’s export drive initiatives, aimed at boosting the sector, seem to be falling short. With the industry facing over N500 billion in tied-up investments and debts, the call for a focused rescue plan has never been more urgent.

The cocoa sector remains a significant part of Nigeria’s economy, but without substantial support and reforms, it risks falling further into disrepair.

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