H2 2018 Oil & Gas Outlook—A Tale of Crude Prices

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·         In the first half of 2018, Brent crude oil prices were majorly influenced by geopolitical risks, stemming from the US pulling out of the Iran Nuclear accord, and crude shortages in Venezuela.        

·         Following the OPEC and OPEC-allies production cut agreement in 2016, the oil market has enjoyed a bout of relative supply stability, with compliance rate at 162% in May 2018. Prices surged on the back of news flow of President Donald Trump’s move to pull out of the Iran deal against other member countries’ wishes.

·         As a result, the market anticipated a loss of about 500,000barrels per day (bpd) in supply over six months following sanctions, which propelled crude price to highs of US$80 per barrel.

·         Also contributing to the price rally of the commodity is the growing concern of supply constraints in Venezuela, which has been plagued by a lack of investments in its oil industry, hyperinflation and US sanctions. This contributed to the country’s oil production levels dipping to a 30-year low of just 1.5million bpd coupled with a lack of impetus to influence a turnaround in the situation.

·         With prices of the ’black gold’ rising above expectations, several countries highlighted their displeasure and called for a rebalancing of the global oil market. Consequently, OPEC agreed towards easing its production cut caps for the first time since 2016 by about 1million bpd. This resulted in Brent price shedding significantly to slow its upward trend.

·         With petroleum products importation guzzling up US$36.3 billion of the country’s FX chest over the last five years, the introduction of refineries in 2019 could prove timely to ameliorate pressures that may arise from a deregulation of the sector as well as putting an end to the occasional fuel scarcity woes. This should also create the  potential for a redirection of FX to more profitable ventures.

·         Moreover, with the FG looking to strategically reduce government equity in refineries and downstream subsidiaries, we may see improved management, capacity utilization and increased investment activities in the downstream operations in the long term.

·         The remaining pieces of the PIB to be passed include Petroleum Industry Administration Bill 2018, Petroleum Industry Fiscal Bill 2018 and the Petroleum Host and Impacted Communities Bill 2018. We believe progress in the passage of the PIB and peace in the Niger Delta, could remain the major risk factor influencing commercial  activities in the Petroleum sector in the medium to long term.

·         While we expect the PIB bill to be the major driver of growth in the sector under review. We outline that much of the Senate’s focus may lean towards the upcoming 2019 elections in the near future. Therefore, we may not see significant progress with the passage of the bill in H2 2018 as previously indicated.

·         This could lead to further losses in the oil and gas industry, with the cost of non-passage estimated to be US$200 billion in 8 years, according to the former President of the National Union of Petroleum and Natural Gas workers (NUPENG), Comrade Achese Igwe.