Wait and see (the price fall)

Oil & Gas
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Friday, November 28, 2014 8:42 AM / FBN Capital Research

 

OPEC predictably decided yesterday in Vienna to hold its production quotas at 30 mbpd, which members exceeded in October by 250,000 b/d on its own figures.

 

The secretary general said after the meeting that members wanted to see how the market behaves and argued that the rapid fall in price did not reflect a “fundamental change”. The answer to Mr el-Badri was not long in coming: UK Brent sold off below US$72/b, its lowest for more than four years.

 

The Saudi position has prevailed: OPEC should tough it out with indebted US shale oil producers, which have breakeven costs highly vulnerable to the lower price. The weakness of this strategy is that OPEC might have to call an emergency meeting to review its game plan before its next scheduled gathering in June.  

At a Securities and Exchange Commission conference yesterday in Abuja, the CME, Ngozi Okonjo-Iweala, outlined the proposed fiscal response to the slide in oil revenues. Clearly Nigeria does not set the oil price although interestingly the minister estimated the breakeven cost for US shale oil at US$75/b. The MPC’s communiqué on Tuesday cited a range of US$52/b to US$70/b.  

 

The FGN is working on a budget for 2015 with a benchmark of US$73/b although the CME alluded to scenarios based on US$65 and US$60, with a possible third at US$40.

 

On the revenue side, Ngozi pledged that collection, which amounted to just 12% of GDP in 2013 (and only 3% for non-oil taxes), would be stepped up. The FGN is to set more ambitious targets for the collection agencies, and generate an additional N480bn over three years from surcharges on luxury goods, plugging loopholes and reviewing waivers it has granted. These welcome steps will not bring immediate relief to the budget.

 

Our take on the expenditure side is that the huge increase in recurrent spending in the past five years makes the US$60 and US$40 thresholds politically unworkable. The US$73/b budget for 2015 leaves recurrent spending unchanged and takes the knife to capital items.

 

While the principal risk to the exchange rate (the oil price) is extraneous, the FGN does have some influence in at least four areas: fiscal tightening, oil output losses, oil industry underinvestment, and “speculative” fx demand, which the MPC’s move on banks’ cash reserve requirements was designed to stem.

 

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