Africa could capitalise on oil price war

Mar 11, 2020 | Forecast, Markets, Oil and gas

Opportunity to extend and fix the tenure of long-term crude supply agreements
While the world is gripped by the ever-changing Covid19 virus updates, it’s important we don’t neglect the other topics that are also changing the world’s landscape.

It’s been widely reported that Saudi’s decision to drop its future oil price by US $6-7 per barrel has resulted in the largest oil price drop since the Iraq invasion of Kuwait in 1991. But what does this mean for the African market?

With Russia entering the price war by announcing an increased daily oil supply in excess of 11 million barrels a day, spot prices fluctuated and equities are in the red. One thing we know for sure is that with African countries being net importers of oil, this will be an opportunity for them to extend and fix the tenure of long-term crude supply agreements.

There’s no doubt that the low oil price will have a detrimental impact on the project economics of most oil and gas projects currently being evaluated, but this price war could be a short to medium-term event rather than one that sees large-scale mega projects being affected, which could take a decade to come onstream.

With global oil demand set to peak in the next 15-30 years, time is critical for any country with ambitions to exploit its oil resources and no delays should be tolerated. Both Mozambique and Tanzania have billions of dollars’ worth of mega liquified natural gas (LNG) projects. In our opinion, these projects will not be too adversely affected by these events and neither will the majority of Africa’s energy exporters.

Africa’s GDP is largely driven by oil exports and a US $30 per barrel price will result in declining GDP growth. For North African energy exporters such as Algeria and Egypt, this would not have an adverse impact as the bulk of their energy exports are gas and not oil and are still net oil importers to fuel their transportation sectors.

But Libya, on the other hand, is about to bring 1 million barrels of oil a day to the market, so Saudi’s news is far from ideal.

As Africa’s second-largest economy in nominal GDP terms, South Africa will benefit from the decline in the oil price. Although it’s interesting to note that Sasol, South Africa’s largest listed company, will feel its margins under pressure as the company’s current breakeven point for its South African operations are US $30 per barrel. This drop in the oil price will effectively wipe out its operating profits, depending on how long this oil price war lasts.

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