Oil prices on Tuesday dropped to slightly above $45 per barrel, nearly a six-year low, igniting fears that except Government urgently intervenes, the poor masses may end up ‘subsidising’ the nation’s price regime, especially at the current pump price.
The oil supply war raging between the OPEC, led by Saudi Arabia, and Russia which was exacerbated by oil scale discovery in the US may have finally culminated in a glut, which economic experts fear, may result in deflation, stunted growth and a new social disequilibrium.
While inflation and deflation may be described as undesirable economic malaise, some agreed that inflation, a condition where prices of goods keep going up, as against deflation where goods prices slide southwards was better managed.
A glimpse into the opinions of Brad Hoppmann of the Uncommon Wisdom team, Christian DeHaemer and Keith Kohl of Energy and Capital; and Anthony Emeordi, a Nigerian industry watcher indicated that except the on going glut was properly managed, the result could ignite crisis on regional and international scale.
“People and businesses usually respond to economic incentives. If the price of something you want is rising, you will probably buy it as soon as possible. If the price is falling, you will more likely wait”, indicated Brad Hoppmann, noting that those simple, individual decisions could indeed, add up to economic chaos.
“Under deflation, a country’s economy will halt. No one wants to buy anything, even if he has money.
“Sellers respond to low demand by reducing prices, which cuts their own income and reduces overall spending even further. This vicious cycle is painful for everyone”, he argued further, stressing that if the current trend continues, a new wave of jobs loss would develop, and hands which have nothing prudent to do may take to crimes.
“One group does benefit from deflation, though. Lenders can prosper because they are receiving debt payments in a currency with more spending power than the one they originally loaned.
“On the other hand, borrowers with no money might fall behind on payments. In that case, the lender’s incentive is to foreclose and seize collateral as soon as possible, before it loses even more of its value”, he reasoned further, a view which Emeordi in agreement also pointed out, may account for why more Nigerians currently in Europe, may start trickling back, into the country.
“There would be more and more job cuts in Europe. The new jobs they will find, would not be as good in remuneration ad the one lost, the temptation would be, to start coming home.
“Well, while there may be nothing wrong in their coming home, the problem would be in the fact that some of them may arrive to find the home environment totally a different ball-game, and subsequently take to crime; high tech crimes!”, he posited further, stressing that head or tail, the Nigerian Government should start adopting crisis management measures, to avoid being caught unaware the second time.
“Not seeing the oil glut is its first major mistake”, he concluded.
Meanwhile, the oil price war may still get worse before any hope of a worthwhile stability is achieved, as things appear to be running fast still.
“Things are moving fast. One Kurdish oil company just announced that it is doubling capacity”, explained DeHaemer, noting that not only was Iraq growing stronger, it has also announced that it is now pumping more oil than at any time since 1980; just as the Kurdistan Regional Government is rushing to expand the capacity of its oil refineries.
Meanwhile, the prices of both Brent and United States crude oil converged this week briefly at a point as Saudi Arabia and its Gulf allies in the Organisation of Petroleum Exporting Countries (OPEC) insist on their refusal to cut production to boost prices.
As OPEC battles not to lose its Asian market share, the glut in the market forced the price of Brent down by $1.56 at $45.87 a barrel after a session low at $45.19, its lowest since April 2009.
Similarly, the United States crude oil West Texas Intermediate (WTI), was down to an April 2009 low of $44.20 earlier in the session before pulling back to trade down about 40 cents at $45.67 a barrel.
The arbitrage between US crude oil and Brent crude oil futures traded at parity for the first time since October 2014, with both markets at $46 a barrel at one point.
It was not immediately clear why the benchmarks converged, but Reuters quoted analysts as saying it was a combination of oversupplied global markets coupled with short covering on the US crude contract.
With the rising glut in the market, both contracts are on track to settle at fresh near-six-year lows.
The Wall Street Journal reported that Goldman Sachs and Société Générale had sharply lowered their oil-price forecasts in their latest reports.
The revisions came on the heels of last week’s lower forecasts from Citigroup Inc., BNP Paribas SA and Commerzbank AG.
Goldman Sachs, one of the most influential US banks in commodities markets, said it had cut its 2015 forecast for Brent to $50.40 a barrel from $83.75 and reduced its 2015 WTI price forecast to $47.15 per barrel from $73.75.
For 2016, Goldman Sachs sees Brent at $70 and WTI at $65, down from $90 and $80 respectively.
In 2008, when oil prices were racing up toward their all-time high at almost $150 a barrel, the bank forecast crude oil could hit $200.
The OPEC price war had intensified as the United Arab Emirates (UAE) last week joined Kuwait and Iraq in pricing crude oil they sell to Asia below that of OPEC’s top producer Saudi Arabia.
The discounts show how Gulf members, who account for more than half of OPEC output, are prepared to take on each other to retain market share and, in so doing, put more pressure on global oil prices.
As well as targeting North American shale, oil ministers from OPEC, including the UAE, have called for exporters, such as Russia, to cut output to lift prices.
Russia, in turn, wants OPEC and Saudi Arabia in particular to cut production first.
The UAE, OPEC’s fifth largest producer, has been expanding its output and remains on track to boost production capacity to 3.5 million barrels per day by 2017, up from about 2.8 million bpd, its oil minister said in remarks published last week.
With additional reports from Thisday.