Kachikwu: OPEC to Restrategise on Output Freeze as Oil Slumps 7%

Ibe Kachikwu

•  Naira rises on prospect of yuan currency swap

As crude oil prices fell as much as seven per cent in early trading monday, before rallying slightly, after attempts by some of the world’s biggest producers to freeze output ended without a deal on Sunday, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, has said

that member countries of the Organisation of Petroleum Exporting Countries (OPEC) will go back to the drawing board to work out a best approach to shore up oil prices.

Kachikwu, who is also the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), said after the disappointing meeting of the cartel last Sunday in Doha where they failed to agree on a production freeze, that they would continue to push until they achieved a consensus that would eventually see to an output freeze among oil producers.

He added that he would, at the next meeting of the oil producers in Vienna, represent the issue again for deliberation.

A statement from the Group General Manager Public Affairs of NNPC, Garuba Deen Muhammad, yesterday in Abuja said Kachikwu spoke to journalists after the meeting of OPEC and non-OPEC oil producers.

Kachikwu stressed that OPEC must work at achieving a workable consensus on the issue by bringing everybody to the negotiating table.

“We are just going to work at it. It is a supply and demand issue and we need to consult and bring everybody into the circle and thank God that a committee is now in place to try and work towards getting everybody on board,” said Kachikwu.

He said once every member country of OPEC is brought on board, it would become easier to convince other major oil producers to sign-up to the production freeze deal.

According to him, the policy is designed to remedy the lingering decline in the price of crude oil. He also disclosed that he would pursue vigorously the plan in the next OPEC ministerial meeting which is slated for June in Vienna, Austria.

The Doha meeting had 18 countries in attendance, namely: Qatar, Kuwait, Oman, Saudi Arabia, Nigeria, Russia, Mexico, Ecuador, Trinidad and Tobago, Iraq, Mexico, Azerbaijan, Kazakhstan, Angola, Bahrain, Indonesia, Venezuela and the United Arab Emirates.

However, news on the stalemated meeting saw oil prices plummet to as low as seven per cent in early trading yesterday, before recovering slightly.

Hopes of a deal to hold crude oil production at last January’s level were shattered by Saudi Arabia’s insistence that Iran, which had refused to participate in the freeze as it rebuilds oil exports after years of sanctions, should be part of any agreement.

Financial Times (FT) reported that the failure to reach an agreement set off another drop in the oil price with Brent, the international benchmark, down 3.9 per cent at $41.42 a barrel in afternoon trading in Asia.

West Texas Intermediate, the US marker, was also down 4.2 per cent at $38.66 a barrel

Talks in Doha aimed at achieving the first global oil deal in 15 years had appeared to be on course on Sunday but they broke up late in the day as ministers failed to overcome opposition from Riyadh, which had hardened its stance in recent days.

Delegates, including some of Saudi Arabia’s Gulf Arab allies, reportedly asked why the kingdom came to Doha when Iran’s position was known well in advance, stressing that they had expected Saudi Arabia to rubber-stamp the deal.

Qatar’s Energy Minister, Mohammed Bin Saleh Al-Sada, said: “We all need time for further consultation.”

Delegates said Saudi Arabia had in effect torn up an earlier draft of the deal as it decided it could not be party to an agreement that would give Iran any leeway.

But Tehran had refused to join the freeze as it rebuilds its oil exports after years of sanctions.

“We are very, very disappointed,” said Falah Alamri, the Iraqi representative. “This will affect the (oil) price and our earnings. We wanted a deal.”

Iran did not send a representative to the meeting, which was attended by major non-OPEC producers such as Russia and Mexico, alongside countries from the cartel. Together they represent almost half of global crude production.

Hopes for a deal had grown among producers as they tried to end a near two-year price slide that has decimated their budgets and sparked fears of a deflationary spiral in the wider world economy.

Oil prices had rallied from below $30 a barrel in mid-January to $43 at the end of last week, partly due to the plans for an output freeze that were led by Qatar, Russia and Saudi Arabia.

FT reported that a second draft that had been circulating on Sunday suggested a freeze would only take place “as long as all OPEC countries and major exporting nations” were unanimous on a deal.

Saudi Arabia said in late 2014 that it did not care if oil prices slid to $20 a barrel, but it had recently indicated a shift in its approach amid pressure on the country’s finances.

However, the country’s Deputy Crown Prince, Mohammed bin Salman, said Saudi Arabia would not sign up without Tehran.

The two regional powers are backing opposite sides in Syria’s bloody civil war, and Saudi Arabia has been fighting Iranian-backed forces in Yemen.

Meanwhile, the naira appreciated against the US dollar on the parallel market yesterday as prospects of a currency swap between Nigeria and China began to sink in.

The naira, which had been hovering between N323 and N325 to a dollar for weeks on the parallel market in Lagos, closed yesterday at N315 to a dollar at Apapa and N317 to a dollar at Marina.

Forex dealers and currency analysts reckoned that the naira would appreciate further, saying that with the development, a lot of speculators might get their fingers burnt.

President Muhammadu Buhari last week travelled with a high-level government delegation to China where he signed a $6 billion deal to fund joint infrastructure projects. During Buhari’s visit to Beijing, the Industrial and Commercial Bank of China Ltd (ICBC), the world’s biggest lender, and Nigeria’s central bank also signed a deal on yuan transactions.

“It means that the renminbi (yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,” Lin Songtian, Director General of the African Affairs Department of China’s foreign ministry, told reporters.

The agreement was reached following a meeting between Buhari and Chinese President Xi Jinping.

In his reaction, a currency analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, who spoke in a phone chat with THISDAY, noted that although the fundamentals of the market were still weak, the forex market which trades on expectations were positive on the currency swap with China.

“The thinking of some in the market is that if the currency swap that the federal government signed with the Chinese government works out well, it is going to reduce the pressure on the naira,” Ezun said.

When asked how speculators in the forex market were responding to the development, Ezun said: “You know currency speculation, in-as-much as it can make someone a millionaire overnight, in the same way it can make that person a pauper overnight.

“So going forward, a lot of speculators that are holding dollars would begin to sell so that they can exit before it crashes below their entry level.

“We should expect that a lot of people would begin to offload their dollars so that they are not caught in between what is happening now. But those that have the capacity to hold for between 90 and 180 days may want to hold it longer.”

Also, Lagos-based CSL Stockbrokers Limited in a report yesterday noted that the Chinese currency swap would help to streamline Nigeria’s trade with the Asian country.

It added that it would ease demand for the dollar and was expected to provide some relief to the parallel market naira/dollar exchange rate.

But the report pointed out that the deal does not alter the fundamental fact that Nigeria is running a current account deficit and will therefore still need investment inflows to stabilise the external account and stimulate the economy.

“Looking first at the currency swap, this essentially entails an exchange of currency between ICBC (which will receive naira) and the CBN (which will receive yuan) at a pre-agreed exchange rate. The two entities will have agreed an interest rate on the swap as well until maturity when the currencies will be re-exchanged.

“Prior to maturity, the CBN can supply Yuan to Nigerians importing goods from China while the ICBC can supply naira to Chinese importers of Nigerian goods. From Nigeria’s perspective, this helps importers overcome the challenge of accessing forex, something that has impinged the ability of many Nigerian firms to operate.

“Importantly, Nigerian importers of Chinese goods (which form the largest share of Nigeria’s import basket) will now not have to buy US dollars to purchase goods from China as they will have some direct access to the Yuan.

“More broadly, the swap deal does not alter the fact that Nigeria is consuming more than it is producing and that more forex (yuan, dollars or any other foreign currency) is flowing out of the current account than in.

“This is reflected by a current account deficit. The swap therefore also does not change the fact that Nigeria will continue to rely on financial and capital account inflows to cover the shortfall in the current account. Until these flows are forthcoming, Nigeria’s external accounts and economy will remain under pressure,” the report added.

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Ifeanyi Emefiele, on Sunday had expressed optimism that the currency swap would strengthen the naira and help reduce the strong demand for the US dollar in the country.