The hopes of many oil producing countries for a sustained rally in the price of the commodity came crashing on Friday as the price of crude fell to $33 per barrel after rising towards $35 earlier last week. The good news of seeing the price of oil rising towards $35 per barrel was short-lived but certainly not unexpected. It appeared that the impact of the agreement between Saudi Arabia, OPEC’s biggest oil producer and Russia, to freeze output to January levels has had a fading effect on price.
However, it was not surprising to some that the first mooted global oil pact to control output in 15 years, which was meant to jumpstart a hike in price of oil, failed to achieve its objective. Though the price of crude oil went upwards from $32 to 35, on the heels of the agreement, the force of gravity that has been pulling down the price from its high of $114 two years ago set in again on Friday. A statement by Standard and Poor’s, a global financial rating agency, shows that the agency had foreseen such an unpalatable outcome. “We do not expect the agreement on Feb. 16, 2016, between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze oil output at the levels reported in January to have a material impact on our oil price assumptions,” it said, adding “We note that the freeze would take place at already record high levels of output for Russia and Saudi Arabia. In addition, we understand the agreement is conditional on other producers also freezing production. We view such a change in policy direction as unlikely in Iran and Iraq.”
Oversupply in the world market
Indeed the stark reality is that the global oil market is still reeling from oversupply. According to the International Energy Agency, global oil demand for the first quarter in 2016 is 94.5 million barrel per day, while the supply is 96.5 million barrel per day. This shows that the global oil market has an overhang of one million barrels per day. Consequently, even if Saudi and Russia went ahead with their agreement to limit oil supply to January level, it would still not solve the problem of one million bpd oversupply, except for production cuts. Never mind that such agreement is even conditioned on other oil producers following suit as no one wants to lose their market share.
The glut on the oil market is, however, poised to balloon as Iran gears up to increase its production by an additional one million barrel, to make up for the lost output owing to sanctions that ended last month. Iran has made it clear that it is not keen on freezing its output to the present 1.1 million bpd, as it aims to reach its pre-sanction level of 2.5 million barrel per day. Little wonder Iran’s oil envoy to OPEC would not tolerate the idea of production freeze. “Asking Iran to freeze its oil production level is illogical … when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices.” Iran’s OPEC envoy, Mehdi Asali, told the Shargh daily newspaper before the talks on Wednesday.
The implication is that there would still be an oil glut in the global market and simple economics explains that when supply is more than demand prices will drop.
Hard times for African oil producing countries
Africa’s top five oil producing countries led by Nigeria have a combined output of about 6.5 million bpd which is way less than the 10 million bpd the Saudi’s produce. This shows that the five African countries, including Angola, Algeria, Libya and Egypt with a combined population of 341.8 million together earn far less than Saudi with a population of about 31 million.
Consequently, these African economies have fewer foreign reserves to burn to cushion the adverse effect of falling oil prices. It is therefore not surprising that the currencies of these countries have suffered against the dollar since oil dropped from its high of $114 per barrel mid-2014. For instance, the Algerian dinar has fallen by 34 percent since oil sold at $114 per barrel, while Nigeria’s naira at the parallel market has fallen by 134 percent within the same period. For these five African countries, the prices of goods have shot up at a time when wages of workers have stagnated.
But more worrying for these countries is the fact that the price of oil has fallen below their national budget benchmarks, therefore throwing their budgets into disarray. In the case of Angola the price of crude is 30 percent below the price that the budget was calculated upon. Such differences might have to be financed through debt.
Perhaps the only good news for these African oil producing countries is that rating agencies have not yet downgraded their debt ratings as S&P did to five other oil producing countries last week, led by Saudi Arabia.