Why OPEC members are cutting petroleum prices – Ibe Kachikwu

The current practice by the Organisation of the Petroleum Exporting Countries (OPEC) members of cutting the prices of their crude oil goes beyond just retaining market share.

Many are also desperate to meet economic development targets, which are being frustrated by the twin problems of oil price crash and market glut.

Explaining why more members are finding price-cuts more attractive, Nigeria’s Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, said that such members “just want to cash into the system to help their development.”

For Nigeria, which has also jumped unto the bandwagon “unofficially”, the minister attributed the development to militancy in the Niger Delta region, which led to buyers’ loss of confidence in the Nigerian market.

He said: “We haven’t officially announced that we are cutting our prices. There have been some unique situations, where because of militancy, the predictability of the Nigerian oil as a market source has become very limited.

“In other words, people don’t plan anymore with the Nigerian oil because you never know what is going to be available. For instance, if you were India that has been buying consistently from us over the last 10 years, and then all of a sudden every month we send you a letter of force majeure, it will be ridiculous of you not to go find another alternative market.

“There are so many issues locked in that need to be resolved. The issue of militancy needs to be sorted out as well as the issue of OPEC limited collaboration.”

Kachikwu also blamed the rising incidence of price cuts on intense competition from non-OPEC and shale producers.

According to him, “What is driving the price cuts is the whole shale environment. Increasingly, it has become clear that once you exceed $43-44/barrel, the shale producers just start ramping back up. It is almost like a pre-determined thing. Sometime ago, when we got almost to $52/barrel, and that was pushing fine, all of a sudden the shale producers began to increase their output.”

With hopes of a possible production freeze, the price of OPEC basket of 14 crudes stood at $43.92 a barrel on Monday, compared with $42.60 the previous Friday. Brent crude futures also rose on Tuesday by 6 cents at $48.41 per barrel in early hours trading. The benchmark is up about 15 percent from the $41.51 low for the month on August 2. U.S. West Texas Intermediate (WTI) was trading at $45.54 a barrel, up 17 cents from its previous close and more than 16 percent above its $39.19 monthly low from Aug. 3.

However, analysts argue that production freeze may not solve OPEC’s problems at the moment, as supply from the Middle East producers have risen by well over 3.3 million barrels per day (bpd) compared to the same period last year, as such market over supply remains an issue.

Defending the rational for the price cut among OPEC members, Kachikwu said the situation is not yet “systemic that it will go on for long,” adding that “some of it is a cash flow thing that member countries are facing.”

On what Nigeria can do under such stiff global competition, the minister said: “I’ll just say: Don’t worry about price but focus on your cost, because if you focus on your cost and prices are tumbling; then you find that just like Saudi Arabia and the rest, you will be able to make some money. Saudi Arabia is producing at $11 per barrel so price will have to fall really, really low before it can begin to hit them that hard.”

Furthermore, he insisted that now is the time for the country to take decisive steps on its product mix, saying: “We need to finalise the petroleum mix of the country; there’s been too much emphasis on crude, the gas needs to take off.”