On the bright side, Opec has built a robust model with a deep focus on collaboration, discussion and information-sharing — highly effective to member countries, oil producers and customers largely dependent on stable economic conditions.

Opec and all of its allied countries except one have agreed to extend oil production cuts through July. The countries even include Russia and Mexico who had pledged to slash oil production 9.7 million barrels a day in May and June — marking the deepest cut agreed to by the world’s oil producers. This in turn has helped to increase prices on the back of resurging demand for crude. In fact, it was reported that the output adjustment in May and June has provided relief to the market and demand has picked up as economic activity is slowly resuming back to normal.

African oil-rich countries take a hit
But the same cannot be said for African oil-rich countries heavily hit by Opec’s production cuts. It started in May when Open and its member countries decided to cut oil output by 23 percent each. With that, it is worth noting that the decision has had a negative impact on African oil-rich countries majorly relying on revenue generated from petroleum commodities.

This is especially true because 14 countries in sub-Saharan Africa produce oil, which accounts for a major chunk of their export income. The major oil producers in Africa include Nigeria, Angola and Gabon. In fact, Angola, Algeria, Nigeria and Libya among others are increasingly dependent on hydrocarbon sales — making them the main casualties of reduced oil output. It appears that an increase in prices between $50 to $60 would allow them to earn the necessary amount of foreign exchange to further carry out development projects.

Despite that, the African Petroleum Producers Organisation showed its support for the resolutions that were determined during the 9th Opec and non-Opec Ministerial meeting. Established in 1987, the African Petroleum Producers Organisation is a body of African countries producing petroleum — and seeks to foster cooperation and harmonisation of efforts among oil producing countries on the continent. The body’s efforts in supporting the resolution is aimed at resolving the global oil crisis caused by the coronavirus outbreak and a price war between the Kingdom of Saudi Arabia and Russia.

It appears that the petroleum ministers and representatives of member countries of the African Petroleum Producers Organisation have taken a stand to support the decisions and processes undertaken by all parties to address the complexities and volatility of the global oil market. The African Petroleum Producers Organisation said in a statement that “Furthermore, we urge the G20 countries to offer assistance to Africa as we struggle to wade off this pandemic and price stabilisation process in the oil markets and encourage the most equipped laboratories and medical institutions in the world to find effective measures accepted by all (proven and consensual scientific results) to rapidly eradicate the progression of the current Covid-19 pandemic.”

Angola resists steeper production cut at first
Earlier this month, Angola was resisting Opec’s request for a steeper oil output cut in line with the agreement between all member countries. As stated earlier, the Opec and allies led by Russia have been slashing output since May, with a record of 9.7 million barrels per day following the pandemic-led crisis.

At first, it was reported that Angola was unwilling to compensate for its overproduction during the period between July and September, however, it would be able to do so between October and December. Against this background, Nigeria and Algeria had to reach out to Angola to encourage it to execute the agreement.

On a close note, Angola saw oil production cut by Opec, its allies and other top oil producers as an insufficient measure to balance global markets. Resources and petroleum minister Diamantino Azevedo, told the media, “It is up to everyone to understand that, despite the measures taken by Opec, oil producers in various countries should be aware that they may be called to take more drastic measures.”

One of the more serious problems identified in increasing production was lack of storage capacity. Angola had pumped 1.28 million barrels per day in May, observed Opec data. This is equivalent to 100,000 barrels per day exceeding its target. That said, the oil producing country slashed its production to 1.24 million barrels per day in June, resulting in 60,000 barrels per day above its target, based on a Reuters survey.

The production cut has had an impact on its long-term supply contracts. In the country, oil accounts for 90 percent of total export revenues and the value of oil exports dropped by approximately 50 percent during the period between April and May. Angola is the second largest oil producer on the continent. This points to Angolan economist Carlos Rosado de Carvalho’s view in an interview with a local media report that “oil is the biggest source of revenue for the Angolan State, and if the State is going to have less revenue, it means that it will invest less, that way the economy ends up suffering.”

But Angola has received a lot of pressure from the joint ministerial monitoring committee to comply with the supply cuts agreements. In addition, other countries including Iraq, Kazakhstan, Nigeria and Gabon have been pressured to commit to the agreement as well. More recently, the country agreed to comply as per its supply cut agreement with the joint ministerial monitoring committee and is willing to compensate for its previous overproduction by reducing output between July and September. The record cuts from all parties are underway before narrowing down to 7.7 million barrels per day until December.

Nigerian economy to suffer from oil slump
Even Nigeria is expected to feel the pinch on the back of slashing oil production. The World Bank forecasts that the country will shrink by 10.6 percent this year, especially with it bringing down its oil production to 1.412 million barrels per day in an effort to comply with the agreement with OPEC and its allies.

In May, the country implemented only 52 percent of the defined output when it pumped 1.613 million barrels per day. Now Nigeria requires to slash approximately 67,000 barrels per day over the next three months to offset the overproduction. Last month, Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, told the media, “Definitely by the end of June, we’ll see full compliance from Nigeria. It will be done in the first half of July in the worst-case scenario. Over the past 10 days, the country has been cutting more than required under the OPEC+ pact.”

That said, the country had reassured its commitment to Opec and its allies on the new extension deal which points to 9.7 million barrels per day. It has promised to show support and collaborate with all parties involved in the deal to rebalance and stabilise the oil market.

The impact of the price slump on African countries is well understood and exporters are bearing the brunt of it on a large scale. In many cases, it is also having a residual effect on the GDP and revenue from sale of hydrocarbons.

Another alarming factor is that Nigerian banks will face serious consequences from oil producers determined to survive the pandemic. This means that traditional firms will be forced to have restructuring discussions with their lenders if the current market conditions continue beyond the next few months.

Truth be told, oil and gas companies account for 30 percent of all banking loans in the third quarter of 2019 and borrowing accounts for 24 percent of all non-performing loans in the country. Some of the lenders with heavy exposure to Nigerian oil companies are First Bank, GTB, Zenith and Access Bank — meaning that when oil prices fall it will directly impact naira and have an indirect effect on the banking industry. Also, power producers and manufacturers might suffer from a weaker naira and further impact banks’ capacity to provide loans.

World Bank, IMF predict GDP drop for African oil producers
A report titled Global Economic Prospects was published by the World Bank in June which found that Nigeria’s energy sector will shrink 10.6 percent this year. In response, the government introduced a revised budget altering the oil price from $57 a barrel to $25 a barrel. In addition, the officials have approved $5.5 billion in loans to finance the new budget deficit.

Austin Avuru, CEO of Seplat Petroleum, told the media, “Overall, our target is to get close to a neutral cash flow position in 2020. So the main target of our budget restructuring is to be able to survive FY 2020, with the hope that during 2021 prices will climb back and we will manage to resume our planned investments. Meanwhile, in 2020 the key word is survival.”

The World Bank said that energy importers on the continent will be protected from the downside effects of the pandemic. Analysts have also expressed views that a reform of subsidies in energy-importing countries could result in freeing up public funds toward economic recovery.

The World Bank has pointed out that African countries including Djibouti, Egypt, Morocco and Tunisia are expected to experience a 0.8 percent drop in GDP this year, compared to the 5 percent contraction predicted for oil exporters in the MENA region last year. Even sub-Saharan Africa exporters are anticipated to experience a 3 percent drop in GDP which is above the average of 2.8 percent GDP.

The International Monetary Authority (IMF) released a report earlier this year which projected that Algeria’s economy on the back of high debt levels and a nil sovereign wealth fund will contract by 5.2 percent this year but revive by a 6.2 percent growth next year. The post-pandemic era might be a challenge for African oil-rich countries to reach market stabilisation in the long-term.

The post Why oil curb is getting worse for Africa appeared first on International Finance.

But the impact of the weak oil prices goes well beyond the energy markets as the plummeting share prices of major oil companies weigh down global stock market indices and rattle credit and emerging markets’ bonds.

Oil companies stagger to maintain high dividends
Quoted oil companies have seen their share prices plummet, as drop in prices reduce the value of oil they have underground, in production and in supply pipelines. One of the attractions of the energy sector for investors has been the relatively high dividend yield and share buyback schemes. While some companies were borrowing to afford these, a few had strong dividend cover.

In addition, research and development expenditure will be pared down and this will impact a plethora of smaller energy sector service companies. Many income funds have traditionally looked to the sector to deliver the yield that their investors require. Active income funds that do not have to follow the stock market index may outperform passive income funds as the sector sees both an underperformance of share prices and potentially severe cuts to dividends.

In a normal world, energy intensive sectors, notably transport and power utilities should benefit from reduced input costs and this would act as a supply-side boost to the global economy. But the pandemic is likely to ravage demand for all but essential fuel consumption over the coming months. Set against the evaporation in demand for air travel, it is difficult to see, for instance, airlines benefitting much from cheaper kerosene.

Truth be told, if the Kingdom and Russia successfully emerge from the pandemic continuing to pump excess production in an effort to win market share—oil consuming sectors may rally sharply.—resulting in a combination of pent-up demand and low energy prices.

Of the major stock market indices, the FTSE 100 has the highest energy weighing of 12.6 percent as at the end of February. The S&P500’s energy weighting stood at 5.6 percent and 5.4 percent for the euro zone-focused Euro Stoxx 50 index.

Of the major developed economies, Japan stands out as having no hydrocarbon energy reserves—and it makes up 0.3 percentage points of the Nikkei 225 index. This makes Japan and its stock market, perhaps, the main beneficiary of low energy prices for when global demand returns to normal—and if Russia and the Kingdom are still engaged in a price war against each other.

Covid-19 worsens the scenario
Some countries despite being dominated by the energy sector can ride out prolonged periods of weak prices. Norway has its $1.1 trillion sovereign wealth fund shared by just 5.3 million people and the Kingdom has approximately $500 billion in foreign reserves. Borrowing costs may increase for these governments but their sovereign debt will remain quality investment grade.

For those countries, the pandemic is yet another reminder of the need to accelerate economic diversification. Some of the other Gulf states do not have large foreign currency reserves—and might have to cut back on public spending and raise taxes. Or they will have to borrow more at higher yields. Many also have plans for economic diversification, but lack the reserves needed to implement them.

That said, countries like Nigeria, Iraq, Venezuela and Angola have entered this crisis with weak state budgets and now look even less able to finance day-to-day spending. This group of sovereign borrowers will be of interest to distressed bond investors who are potentially willing to sit through years of litigation—should defaults take place.

What are Russia and Saudi doing?
Russia is aggrieved that the benefits of its 2016 agreement with the Kingdom and OPEC to limit output and support the oil price have in part gone to the US shale oil sector. It wanted to end the production agreement with the Kingdom in order to put pressure on the US shale industry, which it accuses of stealing market share.

If Russia wanted to attack the sector, now is an opportune moment given the high level of borrowing of the sector at a time when the market is risk averse.

The Kingdom’s response points to a promise to increase production by a quarter and to put pressure on Russia to back down. Russia has limited capacity for a prolonged low oil price and Kremlin has admitted that the low oil price will force it to run a budget deficit this year.

President Trump has greeted the low oil price as being ‘good for the American motorist’, but Republican senators especially from big oil producing states such as Texas and North Dakota have urged the Kingdom to review its policy of brinkmanship with Russia.

The post Weak oil prices dull global stock outlook appeared first on International Finance.

Oil Minister Khaled Al Fadhel said Kuwait has cut its own production output by a percentage more than necessary to effectively achieve the objective. “The compliance of Kuwait was close to 160% last July, ” he told a local news agency. 

Crucially, in the current situation it is important to stop inventories from excess oil production resulting in falling prices. 

Despite excess production, oil prices increased slightly on Monday. This could be as a result of US-China trade war and anticipation that global suppliers would reduce production in crude, analysts said. International benchmark Brent Crude futures at $58.75 a barrel, an increase of 22 cents from the previous settlement. 

However, Al Fadhel said fears of global economic downturn largely impacting crude prices are ‘exaggerated’. That said, crude demand globally should pick up pace in the second half of the year, while simultaneously reducing excess in oil inventories. 

“What we have noticed recently is a different perception of risk in different geographies,” Emily Ashford, executive director of energy research at Standard Chartered said. “Often the price reactions during Asia or London trading are reversed during US trading. Prices seem to be following that pattern today.”

Opec, Russia and other non-Opec producers agreed to cut output by 1.2 million barrels per day effective January 1 for six months. 

Analysts believe that more output reductions are required to support prices. This is mainly because several forecasters and governments predict a slowdown in oil demand growth and  global economy on the whole. 

The post Kuwait determined to implement oil accord to support crude prices appeared first on International Finance.

NBK said in a report: “The economy remains on an improving trend, with activity gradually expanding.”  Even the Kuwait state news agency KUNA reported that the country’s GDP rose 1.6% in the first quarter of this year. Its oil sector contributed 48.4% to the economy in the first quarter, which is up 44.5% in the first quarter of the previous year.

Likewise, Kuwait’s non-oil sector is also expected to grow depending on the government spend in this financial year. Key indicators for growth include job opportunities in the private sector. The government is supporting projects in the sector to boost the Kuwaiti business environment. For example: Kuwait is set to grant four billion dinars for projects this year, the report added. 

The post Kuwait to recover from last year’s economic decline appeared first on International Finance.

IFM Correspondent

June 3, 2016: The price of oil rose slightly despite OPEC producers failing to come up with a solution to curb output at their meeting on Thursday. Brent crude on Thursday ended at $49.94 a barrel, 0.4% higher.

The new oil minister in Saudi Arabia, Khalid al-Falih, often considered the de facto leader of the OPEC countries, had a message for the global market: don’t expect OPEC to influence oil price by cutting supply.

“I think managing in the traditional way that we tried in the past may never come again,” the minister said on Thursday. “Certainly, we will not go with certain price targets.”

OPEC has revised its figure for global economic growth down slightly to 3.1% and believes that oil demand will increase this year by 1.2mbpd while on the supply side they are expecting a reduction of 740,000 bpd, which presumably relates primarily to the US shale market. Over the last 18 months, OPEC has increased output to 32.50 mbpd and believes this to be the level required from OPEC during the second half of the year with the market coming in to balance. The meet ended with the acknowledgement that OPEC will continue its dialogue with non-OPEC producers.

The post OPEC meet maintains status quo appeared first on International Finance.