As oil price rally, it gained a level high of $49.01 on Thursday 29 September 2016, stock markets surge at average 5% favourable to the quoted oil companies in Europe as a result OPEC pronouncement of the agreement to cut production/supply to record 32.5 million to 33 million barrels per day which is a drop of about 750,000 barrels a day. This agreement is unprecedented and the first of its kind in eight years, it is also a market influence for crude oil price to artificially bow to the law of demand and supply, to tweak the hands of the market toward price upside against free market so that member states become better economically and OPEC retains its leadership position as oil market mover.
There have been insinuations since the oil market suffered setbacks in June 2014 that OPEC will implement its power to hoard supply, raise a market hunger for buyers and restore moderate boom for oil prices. Most member states have suffered economic downturn and many have slumped into recessions, cost of production is increasing and there have been supply glut in the markets with shale oil in the US and Russia production surge. While Saudi Arabia is looking inward in raising public debt with issuance of Sovereign bond in July 2016 to fund budget deficit and also cutting cost of governance, Nigeria is considering selling some oil assets to raise cash for survival, Iran is rigorously producing as much oil as possible to get back on the track of civilization after sanction relieve.
Though it is not sure the allocation to member states as aftermath of capping which of course will be made known in November at the OPEC Vienna meeting but the Algiers accord of Oil Ministers has exempted Iran for obvious economic reasons, Nigeria because the activities of the Militants in the Niger Delta areas that have hampered productions and Libya because of the miffed of war. It is incredible how the announcement without action has upended perception against reactionary market behaviour; it is shifting the crude oil market price towards the short term target mark of $50-60.
It is expected that if announcement can bring 5% increase in price, the real implementation should end the bearish price period, cushion the economic challenges among OPEC member states but there are few snags:
History has shown that OPEC might not keep up to the agreement except that Iran is exempted from output cut else the vendetta between Tehran and Riyadh will emerge. We’d see what happens in November and beyond.
The proposed output cut might become an advantage for US shale oil producers and Russia to explore except OPEC is can convince a taming disposition, a gesture to which Russia has shown a positive body language.
Some experts have argued that a cut in 750,000 barrels a day may not reduce the glut to a sustainable volume and price gain could slump in a short time.
The last is the trending issues of green energy revolution which is sweeping across the world, a high rate of development of electric cars, solar and wind energy production and engineers are looking at producing green generators to replace carbon based generators. This will eventually reduce demand for fossil fuel across board.
Aside the anticipated challenges, it is hoped that price will surge and oil revenue to Nigeria will increase, exchange rate will stabilize, price inflation will calm and the economy will start growing again. It is also hoped that the government of Nigeria will tame roller coaster kind of policies, build long term goal, garner political will to grow the SME sector and power the economy towards diversification. It is hoped that the economy will grow again in real sense!