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Oil drops below $28 for first time since 2003

By on January 20, 2016

The price of Brent crude fell below $28 per barrel monday for the first time in 12 years, as oil traders braced for Iran’s return to the global oil market after years of economic isolation as a result of international sanctions over its nuclear programme.

The development potentially presents more trouble for Nigeria, as the federal government’s 2016 budget is predicated on an oil price of $38 per barrel.

This is coming as the imminent return of Iran to the market also threatens the export of Nigerian crude oil to South Africa, as Nigeria was said to have filled the supply gap when South Africa stopped importing Iranian oil due to the international sanctions lifted at the weekend.

UK’s Financial Times reported that Brent crude fell as much as four per cent yesterday to a 12-year low of $27.67 a barrel and extended losses since the start of 2016 to more than 25 per cent. Prices later recovered to above $28 a barrel as traders banked profits on bets against the price.

US benchmark West Texas Intermediate fell to $28.36 yesterday — the lowest since 2003.

The Organisation of Petroleum Exporting Countries (OPEC), which controls more than a third of world output, said yesterday that the average price of a basket of members’ crudes had already fallen below $25 a barrel – barely a quarter of the level it averaged between 2008 and 2014.

But as the oil market battles with an estimated 1.5 million barrels per day excess inventory, Iran said it would swiftly take more crude to the market, after Western sanctions were lifted, despite the threat of adding to a glut that has already crashed prices by almost 75 per cent in the last 18 months.

The US agreed at the weekend to lift sanctions targeting Iran’s oil industry after Tehran implemented steps designed to curb its nuclear ambitions.

Sanctions on Iran had cut its exports from 2.5 million barrels a day (mbpd) in 2011 to a little over 1mbpd, putting severe strain on its economy.

Satellite tracking data and industry sources indicated that Iran already has a flotilla of more than 20 very large crude carriers (VLCCs) loaded off its coast, allowing it to potentially push as much as 50 million barrels of heavier crude and ultra-light condensate oil quickly into the market.

By the end of 2016 Iran said it would be able to get exports back to 2mbpd, lowering the chance of Saudi Arabia, Iran’s chief regional rival, agreeing to lead any kind of output reduction to shore up the price.

Before the sanctions were imposed on Iran, the country had dominated crude oil exports to South Africa.

But with the sanctions, South Africa stopped importing Iranian oil and switched over to Nigeria and Saudi Arabia.

However, with the potential return of Iran, which is the fifth biggest producer among OPEC producers, it is expected that the country will regain its lost position and displace Nigeria and Saudi Arabia in supplying crude to South Africa.

The Executive Director of the South African Petroleum Industry Association (SAPIA) Avhapfani Tshifularo confirmed to Bloomberg yesterday in an e-mailed response to questions that “the re-emergence of Iranian crude oil provides options for those willing to buy from Iran”.

“Iranian imports are likely to displace the Nigerian and Saudi Arabian crudes, since they seem to have filled the gap since South Africa stopped importing Iranian crude oil,” Tshifularo said.

SAPIA compiled the nation’s crude import data from its member refiners and the South African Revenue Service.

India, Spain, Netherlands, South Africa and Brazil are some of the current destinations of Nigeria’s crude.

Despite the continuing decline of oil prices in the global markets, the Nigerian naira continued to firm up against the United States dollar on the parallel market monday where it appreciated to about N286 to a dollar in Lagos, compared to N294 to the dollar at which it sold last Friday.

The development was a reflection that confidence was gradually returning to that retail segment of the forex market following a meeting between the Central Bank of Nigeria (CBN) and the Association of Bureau De Change of Nigeria (ABCON) at the weekend.

The central bank had assured BDC operators present at the meeting that it would ensure that there is enough supply of the greenback from the autonomous market sources.

However, the CBN Governor, Mr. Godwin Ifeanyi Emefiele, reiterated the CBN’s decision not to sell dollars to the BDCs any longer.

BDC operators who spoke to THISDAY said the meeting with the CBN governor had helped to restore confidence to the parallel market, hence the appreciation of the local currency against the greenback.

 

[ThisDay]