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Preparing Nigeria for Possible Crude Oil Production Cut

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  • Preparing Nigeria for Possible Crude Oil Production Cut

A capping or reduction in Nigeria’s crude oil output is likely going to happen soon and this will impact the economy adversely considering the economic significance of the commodity, stakeholders have said.

Earlier this week, it was reported that the Organisation of Petroleum Exporting Countries may ask Nigeria and Libya to cap their crude oil output soon in an effort to help re-balance the global crude oil market.

This is because the two countries had boosted oil production since they were exempted from the global cuts led by the OPEC and other producers.

OPEC and non-OPEC producers have invited the two African nations to their committee meeting in St. Petersburg, Russia, on July 24, 2017, to discuss the stability of their production, according to the Kuwait Oil Minister, Issam Almarzooq.

Almarzooq is also the chairman of the committee monitoring the compliance of OPEC and non-OPEC suppliers with output cuts that started in January to the extended date of March 2018.

To cushion the effect of an imminent cut in Nigeria’s crude production on the economy, stakeholders and operators in the oil sector urged the Federal Government to start implementing measures that would boost economic activities outside oil export.

They noted that the exemption of Nigeria by OPEC with respect to capping its crude production might end anytime soon, judging by the recent comments of the oil cartel’s official.

Almarzooq had earlier said, “We (OPEC) invited them (Nigeria and Libya) to discuss the situation of their production. If they are able to stabilise their production at current levels, we will ask them to cap as soon as possible. We don’t need to wait until the November meeting to do that.”

Crude price sank into bear territory last month amid concerns the cutbacks by OPEC, Russia and other allies were being partially offset by a rebound in supply by Libya, Nigeria and United States’ shale output. Libya and Nigeria were exempted from the cuts due to their internal strife.

“Any cut in Nigeria’s crude output will, of course, impact negatively on our economic activities because oil is the mainstay of this economy,” a former President, Association of National Accountants of Nigeria, Dr. Samuel Nzekwe, said.

He added, “This is why the government must now begin to look inwards to get money and we can see that they are trying to do so through taxation using the Federal Inland Revenue Service. Also, we’ve been hearing about yam export from Nigeria recently, which is geared towards earning more foreign exchange.

“So it is no gainsaying to state that Nigeria must make all necessary preparations to mitigate the severe impact of a possible cut in crude output. For if there is any cut or if Nigeria is asked to put a cap to its crude oil production, it is going to hit the country seriously.”

Nzekwe noted that this was another reason why some government officials often talked about borrowing, but was quick to state that the notion had been criticised in some quarters, as the cost of servicing such loans was high.

“It is therefore glaring that presently we are having financial problems as a country and if you now cut our crude production output, then there is going to be more economic chaos for us in Nigeria,” he said.

On the way forward should the global oil cartel ask Nigeria to cap its crude production, Nzekwe said, “I think what we should do now is to further ascertain how to generate more funds internally and also export more of our products, both raw and manufactured goods. If we don’t do this, at the end of the day we will find ourselves in a very big mess.

“There is need for an enabling environment that will allow businesses to thrive. The manufacturing sector of the economy must be allowed to thrive. We must look at what to do in order to start importing less and produce more of what we consume in Nigeria.”

He added, “If we do that, even if there is a cap or reduction in our supply of oil, we will not feel the impact as being that severe. But because virtually all we use in Nigeria today are imported, we spend the limited foreign exchange we have on these imported items and deplete our reserves.

“If we have food security, if manufacturers are producing more than 70 per cent of what we need in Nigeria and we export more than we import, then there will be less cause for worry. So Nigeria should see the possibility of cutting its crude production as a warning and must be prepared to adjust aright.”

The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had earlier hinted that OPEC might ask the country to cut its production output.

He stated that the country was open to such request, adding that it was the responsibility of member countries to do all that was necessary to ensure stability in crude oil prices.

The minister said, “Serious members of OPEC will support the cuts when we are sure that we can have a stable and predictable production. Yes, we’ve got 1.7 million barrels production daily, but it is still below the 1.8 million barrels that was used as benchmark for us at OPEC.

“But the reality is that this is a very difficult terrain and we’ve got to watch it for a couple of months to be sure that what you see is quite sustained. We will ultimately find stability in this market. Nigeria will do whatever it takes to help that stability.”

Kachikwu, however, expressed hope that oil prices might stabilise later this month or in August, adding that conversations with other OPEC members would determine to what extent Nigeria would have to support in stabilising crude prices globally.

“I’m sure that by the time I have conversations with my colleagues, we will determine at what time frame we will see Nigeria coming in, with a lot more predictive analysis of what our market is looking like and what we need to do to further help. Hopefully by then, we would have been out of the price uncertainties that we are seeing today,” he added

The oil minister explained that Nigeria and Libya came into focus after they seemed to resolve some of the political challenges that had slashed their production.

Libya’s oil output climbed to more than one million barrels per day for the first time in four years, while Nigeria’s production rose by 50,000 barrels per day in June, according to a Bloomberg survey.

Giving that Libya and Nigeria’s exemptions to production cuts was a collective decision, and any proposal to include them in OPEC’s plans would also require a joint decision, the Secretary-General, OPEC, Mohammed Barkindo, told reporters at a recent event in Istanbul.

Barkindo, however, noted that it was still too early to discuss steeper cuts by the group and its allies.

On whether the crash in crude oil price and the likely call by OPEC for a reduction in Nigeria’s oil production would impact the implementation of the country’s 2017 budget, Kachikwu replied, “In terms of the budget impact, definitely.”

He added, “The Ministry of Finance is looking for ways to cover some of this shortfall and part of that is efficiency, like how to cut down our expenditures. So the budget will be impacted.

“We are working hard at the Federal Executive Council to see how we can forecast or predict that sort of impact in order to see how we can cover them.”

Another petroleum analyst, Mr. Bala Zakka, told our correspondent that the Federal Government must look at ways to mitigate the harsh economic realities that would follow any likely cut in crude output by Nigeria.

to him, most Nigerians were already suffering the negative effect of an economy that is in recession. He noted that it would be too much to bear if no concrete step was taken to cushion the effect of a reduction in Nigeria’s crude oil production.

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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Economy

Nigeria’s Inflation Rises to 34.19% in June Amid Rising Costs

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Food Inflation - Investors King

Nigeria’s headline inflation rate surged to 34.19% in June 2024, a significant increase from the 33.95% recorded in May.

This rise highlights the continuing pressures on the nation’s economy as the cost of living continues to climb.

On a year-on-year basis, the June 2024 inflation rate was 11.40 percentage points higher than the 22.79% recorded in June 2023.

This substantial increase shows the persistent challenges faced by consumers and businesses alike in coping with escalating prices.

The month-on-month inflation rate for June 2024 was 2.31%, slightly up from 2.14% in May 2024. This indicates that the pace at which prices are rising continues to accelerate, compounding the economic strain on households and enterprises.

A closer examination of the divisional contributions to the inflation index reveals that food and non-alcoholic beverages were the primary drivers, contributing 17.71% to the year-on-year increase.

Housing, water, electricity, gas, and other fuels followed, adding 5.72% to the inflationary pressures.

Other significant contributors included clothing and footwear (2.62%), transport (2.23%), and furnishings, household equipment, and maintenance (1.72%).

Sectors such as education, health, and miscellaneous goods and services also played notable roles, contributing 1.35%, 1.03%, and 0.57% respectively.

The rural and urban inflation rates also exhibited marked increases. Urban inflation reached 36.55% in June 2024, a rise of 12.23 percentage points from the 24.33% recorded in June 2023.

On a month-on-month basis, urban inflation was 2.46% in June, slightly higher than the 2.35% in May 2024. The twelve-month average for urban inflation stood at 32.08%, up 9.70 percentage points from June 2023’s 22.38%.

Rural inflation was similarly impacted, with a year-on-year rate of 32.09% in June 2024, an increase of 10.71 percentage points from June 2023’s 21.37%.

The month-on-month rural inflation rate rose to 2.17% in June, up from 1.94% in May 2024. The twelve-month average for rural inflation reached 28.15%, compared to 20.76% in June 2023.

The rising inflation rates pose significant challenges for the Central Bank of Nigeria (CBN) as it grapples with balancing monetary policy to rein in inflation while supporting economic growth.

The ongoing pressures from high food prices and energy costs necessitate urgent policy interventions to stabilize the economy and protect the purchasing power of Nigerians.

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Inflation to Climb Again in June, but at a Reduced Pace, Predicts Meristem

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Nigeria's Inflation Rate - Investors King

As Nigeria awaits the release of the National Bureau of Statistics’ report on June 2024 inflation, economic analysts project that while inflation will continue its upward trajectory, the pace of increase will moderate.

This comes after inflation rose to a 28-year high of 33.95% in May, up from 33.69% in April.

Meristem, a leading financial services company, has forecasted that June’s headline inflation will rise to 34.01%, a slight increase from May’s figure.

The firm attributes this persistent inflationary pressure to ongoing structural challenges in agriculture, high transportation costs, and the continuous depreciation of the naira.

Experts have highlighted several factors contributing to the inflationary trend. Insecurity in food-producing regions and high transportation costs have disrupted supply chains, while the depreciation of the naira has increased importation costs.

In May, food inflation grew at a slower pace, reaching 40.66%, but challenges in the agricultural sector, such as the infestation of tomato leaves, have led to higher prices for staples like tomatoes and yams.

Meristem predicts that food inflation will persist in June, driven by these lingering challenges. Increased demand during the Eid-el-Kabir celebration and rising importation costs are also expected to keep food prices elevated.

Core inflation, which excludes volatile items like food and energy, was at 27.04% in May. Meristem projects it to rise to 27.30% in June.

The firm notes that higher transportation costs and the depreciation of the naira will continue to push core inflation up.

However, they also anticipate a month-on-month moderation in the core index due to a relatively stable naira exchange rate during June, compared to a more significant depreciation in May.

Cowry Assets Management Limited has projected an even higher headline inflation figure of 34.25% for June, citing similar concerns.

The firm notes that over the past year, food prices in Nigeria have soared due to supply chain disruptions, currency depreciation, and climate change impacts on agriculture.

This has made basic staples increasingly unaffordable for many Nigerians, stretching household budgets.

As inflation continues to rise, analysts believe the Central Bank of Nigeria (CBN) will likely hike the benchmark lending rate again.

The CBN’s Monetary Policy Committee (MPC) has raised the Monetary Policy Rate (MPR) by 650 basis points this year, bringing it to 26.25% as of May 2024.

At a recent BusinessDay CEO Forum, CBN Governor Dr. Olayemi Cardoso emphasized the MPC’s commitment to tackling inflation, stating that while the country needs growth, controlling inflation is paramount.

“The MPC is not oblivious to the fact that the country does need growth. If these hikes hadn’t been done at the time, the naira would have almost tipped over, so it helped to stabilize the naira. Interest rates are not set by the CBN governor but by the MPC committee composed of independent-minded people. These are people not given to emotion but to data. The MPC clarified that the major issue is taming inflation, and they would do what is necessary to tame it,” Cardoso said.

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Nigeria Faces Fuel Crisis with Petrol Costs Surging to N978/Litre

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Petrol - Investors King

Nigeria is grappling with a severe fuel crisis as the landing cost of Premium Motor Spirit (PMS), commonly known as petrol, has skyrocketed to N978 per litre.

This surge, driven by a depreciating naira and rising international costs, has led to widespread fuel shortages and long queues at filling stations across the country.

The latest figures reveal that the landing cost—which includes the international price, shipping, insurance, and other charges—has increased from N720 per litre in October 2023.

This escalation is attributed to the naira’s depreciation, which hit a three-month low of N1,530 per dollar on the parallel market this week, exacerbating the already dire economic situation.

“The rising landing cost of petrol is a result of the escalating foreign exchange (FX) crisis. There are market interventions through subsidies, as most Nigerians cannot afford the market price for petrol,” a senior executive in the downstream sector explained.

Despite the federal government’s denial of an ongoing subsidy, a report from the finance minister, Wale Edun, projected that fuel subsidies could cost about N5.4 trillion in 2024, up from N3.6 trillion in 2023.

The fuel scarcity has led to black market prices soaring between N1,000 and N1,100 per litre, while some retail outlets in Abuja, Nasarawa, and Niger have hiked pump prices to N900 per litre.

Motorists have been forced to spend hours in queues, further straining their daily lives.

NNPC Limited attributed the current fuel queues to recent thunderstorms and logistical challenges disrupting activities at fuel-loading jetties.

The company assured stakeholders that it is working to resolve the situation and clear the queues.

“We have no problem covering our gasoline payments. This is just money for normal business and not a desperate act,” said Mele Kyari, the group’s general manager.

He also mentioned that NNPC is considering securing a $2 billion loan using crude oil pre-payments as collateral to support its business activities.

Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, noted, “The government is partially subsidizing the commodity for political, social, and economic reasons. While economically sound, the social and political costs are significant.”

Market analysts have called for a review of dollar-based fee collections to reduce petrol costs. “We must resist the dollarization of the Nigerian economy. There are some fee collections in dollars that are also pushing up the landing cost of petrol,” a source said.

The Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN) confirmed that NNPC is addressing the supply issues, but warned that the queues might persist for days, especially in locations far from major depots.

“Once they start loading, it takes some days to clear the queues. And don’t forget that filling stations in Abuja get products from Lagos, Oghara, Warri, Port Harcourt, or Calabar, and that takes more than three days turn-around time to accomplish,” said PETROAN president Billy Gillis-Harry.

He said there is a need for collaboration between the government, NNPC, and downstream operators to find a lasting solution to the fuel scarcity.

“We need a clearly defined council with grassroots knowledge of the business to project and address problems based on empirical evidence,” he stated.

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