By:Justicia Shipena
The cutting of oil production by oil producers led by the Organisation of the Petroleum Exporting Countries (OPEC+) is a tactic for them to generate more revenue, Mines and Energy Ministry’s Petroleum Economist Abednego Ekandjo has said.
Earlier this month, OPEC said it will make another deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group seeks to boost flagging oil prices.
“So it is basically a tactic or a strategy for them to generate more revenue. By cutting oil production or supply they are creating scarcity in the global oil market. So that scarcity pushes prices of oil up,” Ekandjosaid.
He added that any cut in production will result in oil prices to spike.
“And that is why these countries are doing it because their governments rely on high oil prices to fund their budgets.”
He explained that oil prices still remain violated adding that it is why one will see all these OPEC member countries cutting production.
Ekandjo stated that this also needs to be coupled with the exchange rate which has been shooting up.
Last month, the South African rand crashed to their previous record low, losing more than 30 cents of their value against the US dollar in minutes after Brigety the US ambassador to South Africa accused South Africa of providing weapons and ammunition to Russia.
“Especially last month, we saw a very high exchange rate so if you couple that with high crude oil prices, prices will definitely go up,” he said.
Saudi Arabia’s energy ministry said the country’s output would drop to 9 million barrels per day (bpd) in July from around 10 million bpd in May.
OPEC+ pumps around 40% of the world’s crude, meaning its policy decisions can have a major impact on oil prices.
Simonis Storm Economist Theo Klein told The Villager that OPEC might continue to announce daily oil production cuts in an attempt to push up global oil prices which he adds would be unsuccessful.
He said that earlier in 2023, OPEC announcements to limit daily oil output had a relatively short-term influence on global oil prices, and he expects the same now.
“We do however, expect that OPEC might continue to announce daily oil production cuts in an attempt to push up global oil prices but we do believe this will be largely unsuccessful as so we could probably see global oil prices continuing to remain within the 70 range until the end of the year,” said Klein.
Klein added that underlying market fundamentals in terms of demand and supply continue to support the downward trend in global oil prices, forecasting that oil prices will remain close to US$72 per barrel.
However, he stated that with the Rand anticipated to remain relatively weak versus the US dollar, local fuel prices could rise.
“But given that the national energy fund is used by the ministry of mines and energy to subsidise the same of the under recoveries that they incur on oil prices it can be that local fuel prices continue to remain unchanged as we have seen in the last two months.”
Klein stated that many experts around the world are still anticipating advanced nations to enter a recession in the rest of 2023, adding that there is already a reduction in both export orders and manufacturing orders.
This Klein statement implies that the degree of manufacturing in various countries is declining.
“So this should then place downward pressure on the demand for oil.”
In April this year, the oil producers led by Saudi Arabia announced a surprise production cut from May of more than one million barrels per day.
The surprise decision to cut supply which took effect last month briefly sent international benchmark Brent crude around $9 higher, but prices have since retreated under pressure from concerns about the weakness of the global economy and its impact on demand.
OPEC+ has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April.
These cuts were valid until the end of 2023 and however, during the same announcement for the July cut OPEC+, in a broader deal on output policy agreed after seven hours of talks, said it would extend them until the end of 2024.
Meanwhile, Chief Economist at Capricorn Asset Management Floris Bergh says that there are many factors that affect local fuel prices.
According to Bergh, the oil price reacted very calmly in the aftermath of the announcement.
He highlighted that so far in the first week of June, oil has climbed by roughly 5% in US dollar terms, and that the market is likely anticipating that future cuts will have a greater impact on the oil price in terms of pushing it higher.
“So far oil prices have traded around its long term averages of 78 dollars per barrel,” he said.
He added that going forward, it is difficult to know what the price of oil and currency’s impact will be.
“There has not been a train smash yet. What we do have to take into account is two more factors one is that Namibia does not import oil as such, we import fuel and diesel so what happens in the pipeline is also a factor. The further factor is the currency. When the currency depreciates it factors in the cost of fuel that Namibia imports.”
Bergh remarked that the currency has strengthened thus far in June, indicating that the Namibian dollar in terms of the oil price is up just around 8% in June.
“So the 5% in the oil jump has not shown up directly in the Namibian dollar price of oil so unfortunately for now it seems the currency is helping us out in the sense that our fuel import will not jump as much. Going forward it is extremely difficult to know what the price of oil and currency will do,” explained Bergh.
He concluded that OPEC’s decision is not all that awful for Namibia.
“So far this year things have been okay but unfortunately the future is obviously dark.”
OPEC’s Production Cuts Aimed AAt Maximising Revenue, Petroleum Economist Asserts …Namibia local fuel to feel the pinch less
