December 5, 2021/Proshare

by FDC

OPEC and its allies kept to their current output expansion plan, despite demand concerns following the emergence of the new Covid-19 variant (Omicron). The current plan involves ramping up output by 400,000bpd each month from August through 2022 until pre-pandemic pumping levels are attained as the alliance attempts to gradually reverse last year’s record supply cuts of roughly 10 million barrels per day.

The decision to maintain status quo came as a shock to the market as most analysts had predicted that the emergence of the new Covid-19 variant and the White House’s resolve to boost supply would compel the oil cartel to adjust its output expansion plan. Prior to the meeting, US and other oil importing countries made moves to tap their Strategic Petroleum Reserves in order to lower oil prices which had rallied to a threeyear high of $86pb.

With the re-imposition of lockdown measures and movement restrictions across some European countries dimming the oil demand outlook, the worry then becomes that of a potential supply glut with internal reports suggesting a potential surplus of 3.8 million barrels by March, 2022. This could possibly send oil prices plunging to below $50.

Oil prices bounced back after OPEC+’s announcement, erasing the days losses. Brent crude rose 1.35% to $69.35. The market reaction also suggests a belief that OPEC+ perceives that global oil demand will remain resilient during the winter season. In a press release post-meeting, OPEC is quoted as saying that they… “Agree that the meeting shall remain in session pending further developments of the pandemic and continue to monitor the market closely and make immediate adjustments if required”.

A fall in oil prices would be negative for Nigeria’s fiscal and external accretion. It will widen the projected deficit and compel more borrowing while also giving the CBN less ammunition to defend the naira with. On a brighter note, lower oil prices would lower the landing costs of petrol which would translate into lower pump prices. This is noteworthy given the government’s plan to finally phase out fuel subsidies in early 2022.