December 4, 2020/Proshare
by CSL Research
Following yesterday’s meeting, OPEC and other oil-producing nations led by Russia reached a deal to modestly increase production in January amidst a raging second wave of the corona virus pandemic though with the prospect of vaccines offering some hope.
Based on the agreement, members of the Organization of the Petroleum Exporting Countries along with Russia and other countries will raise production gradually by 500,000 barrels a day over a 3month period starting in January. The increase, though less than 1% of the global oil market, comes amidst a second wave of corona virus which is currently weighing on demand.
According to reports, the agreement was a compromise between countries that wanted a much larger increase of two million barrels a day, which was previously agreed on, and others that would prefer to maintain current production cuts of c.7.7mbp. The latter are considering the many uncertainties around the pandemic and the possibilities that demand will remain low. That said, the disagreement between both groups suggests that agreed quotas may not be adhered.
Looking ahead, we expect the modest increase in OPEC+ production and the prospects of discovery of effective vaccines to remain positive for oil prices in the short term if production cuts are adhered to. We however expect the rally in oil prices to be capped by subdued growth in the global economy which would continue to limit the pace of recovery in oil demand.
Coming home to Nigeria, a combination of both higher oil prices and lower production cuts is needed to fund the country’s 2021 budget which is predicated on a production volume of 1.86mpd and oil price of US$40 per barrel.
Amidst a recession, the hope of an economic rebound is largely hinged on sustained rebound in crude prices as the country has suffered a significant slump in revenue largely due to weak oil revenue. Furthermore, the economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves.
