The price of Brent crude monday rose for the sixth consecutive trading day in a row, hitting a 2016 peak of over $40 a barrel, as buyers were encouraged by talk that the Organisation of Petroleum Exporting Countries (OPEC) was targeting a higher anchor price after a sell-off that has lasted nearly two years.
The rise in oil prices coincided with comments by the President of Dangote Group, Alhaji Aliko Dangote, who advised Nigerians to stop viewing the low oil price environment as a setback, saying that the situation offers the nation an opportunity to diversify its revenue base.
Reuters reported that oil prices also got a boost from data showing a smaller-than-expected build-up in stockpiles at the Cushing, Oklahoma delivery hub for United States crude futures.
Despite the rebound in crude price, some analysts cautioned that the global crude glut remained a huge challenge.
Global crude prices have risen more than 40 per cent since hitting 12-year lows less than two months ago.
The rebound from oil price lows of around $26 a barrel has also been driven by chart-related buying and asset rotation by investors that resulted in higher allocations into commodities such as oil and metals, as well as equities.
Brent, the global benchmark crude, rose by $2.18 at $40.90 yesterday, while its session peak was $41.04, the highest since December 9, 2015. United States’ WTI crude was also up $2 at $37.92 a barrel, after hitting a two-month high and closing at $38.11.
Traders said price gains accelerated after market intelligence firm Genscape reported a smaller-than-expected rise in crude stockpiles at the Cushing, Oklahoma delivery hub.
Major OPEC producers are privately starting to talk about a new oil price equilibrium of $50, New York-based consultancy PIRA told Reuters.
The Minister of State for Petroleum, Dr. Ibe Kachikwu, said last week that as part of measures to stabilise crude oil prices, some members of the OPEC were scheduled to meet with swing producer, Russia on March 20 in Moscow to fine tune collaborative strategies.
Kachikwu said the cartel would target a new oil price equilibrium of $50 a barrel.
Officials from less influential members such as Venezuela or Angola were reported to have occasionally referenced specific prices, generally in the vicinity of $70 to $80.
But the bigger Gulf producers have largely avoided any public mention of a new reference point, leaving the market adrift.
After years of signalling satisfaction with prices hovering at around $100 a barrel, Saudi Arabia in late 2014 led OPEC in its most dramatic policy shift in decades.
The world’s top oil exporter, or its OPEC allies, chose not to cut production to support such high prices, which they feared would erode their share of the world market. Instead, they kept pumping and allowed prices to fall.
However, while they did not anticipate the longest and deepest oil price rout since the mid-1980s, the effort has at last begun to curb the rise of rival higher-cost producers such as United States shale drillers, another sign that prices may have bottomed out.
In spite of the price recovery, Dangote yesterday said Nigerians should stop viewing low oil prices as a setback, adding that the situation should galvanise the country into broadening its revenue base through diversification of the economy.
Africa’s richest man also revealed that in the next five years, the Dangote Group would grow one million tonnes of rice for domestic consumption. Dangote also said his company plans to buy phosphate from Morocco and potash from Congo-Brazzaville to feed a planned fertiliser plant.
Dangote said this when he spoke at The Economist Nigeria summit titled, “The Dawn of a New Day?” which held in Lagos yesterday.
Dangote Group has raised a $3.3 billion loan to develop a $9 billion oil refinery and petrochemical complex in Nigeria, Africa’s biggest economy and top oil producer, and has invested $3.5 billion of its own equity in the project.
According to him, his firm was close to signing a deal with a Moroccan firm to supply phosphate, without giving details. He also said his planned oil refinery would have a capacity of 650,000 barrels per day (bpd), up from an initial plan of 400,000 bpd.
He however noted that some sectors in the country were facing serious challenges as a result of scarcity of foreign exchange.
“If your business model is to import 100 per cent, definitely you would be facing challenges because the inflow of foreign exchange is not where it used to be a year and a half ago. Then we used to get about $3.2 billion on a monthly basis, but today we are generating just about $1 billion.
“This is the right moment to pursue the diversification of the economy which we have been talking about. I know that once oil gets back to $80 per barrel, we would relax and go back to the same improper behaviour. But I think this is the right time to change that atitude for good.
“Government must come up with the right policies because if we don’t do it now, we may not do it ever. But low prices do not mean doom. In 1998 – 1999, the price of oil was $9, so what we need to do is just to block the leakages and pursue diversification,” he added.
He urged Nigerian businesses to take advantage of the opportunities in the West African sub-region, saying that a population of 320 million in the sub-region is a big market.
“Our projects are mainly focused on import substitution. We are working to be self-sufficient. What we need is consistency in terms of policies. By 2020, our population would be over 200 million people and it doesn’t make sense to continue to go to the central bank to collect forex to import goods for over 200 million people. We need to work towards being self-sufficient.
“The biggest challenge we have in Hadeja (Kano State), where we are doing our pilot project on rice, we realised that even the fertilisers that people are selling there, 25 per cent of the fertiliser has sand inside the bags.
“Now, in the next five years, we would grow one million tonnes of rice. Do we have the market? Of course there is a market locally. Nigeria imports rice officially and unofficially of almost 2.8 million tonnes. Majority of it comes from the borders,” he said.
In his contribution, the Group Managing Director, Access Bank Plc, Mr. Herbert Wigwe, pointed out that there are several manufacturers that rely on forex for their raw materials and are now going through tough times due to the shortage of dollars.
“However, are there opportunities? I believe there are. I think it is time for us to move towards import substitution. But I think we need to do things to support the supply side of forex and liberalise the market. Even for those who have to source their raw materials locally, there is a value-chain effect.
“If the entire value-chain in a production process is not sorted out, we would have a problem. So access to foreign currency for raw materials is important. However, it is important that people start looking at how to use local raw materials to produce,” Wigwe said.
The Access Bank boss, who stressed that forex scarcity was creating significant bottlenecks in production processes of firms, however ruled out a banking crisis. According to Wigwe, Nigerian banks are healthy.
Also, the chief executive of Oando Plc, Mr. Wale Tinubu, stated that as a result of the slump in crude prices, there has been a lot of restructuring in the oil and gas industry.
He also pointed out that investors were concerned about the country’s exchange rate policy and the future plan of the naira.
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