Crude Oil: “Historic” Production Cuts; Implications For Nigeria
Crude oil: Duringthe public holidays, the alliance of OPEC+ producers, G-20 energy ministers and other oil producers reached a landmark deal, which could cut close to 15.0mb/d from global oil supply. The details of the deal include:
- A 9.7mb/d oil production cut from OPEC+ producers for two months ending in June 2020. Over the next six months (July – December 2020), total production cut would fall to 7.7mb/d and then to 5.8mb/d over the subsequent 16 months ending April 2022,
- A 3.5mb/d oil production cut from non-OPEC+ and G-20 Crude oil producers.
- Significant increase in crude oil purchases into strategic reserves.
We note that the sum of the agreed cuts brings total agreed cuts to 13.2mb/d but this is based on October 2018 production levels as the baseline for cuts. If we make April production the baseline, then total cuts come to 17.2mb/d which is much closer to the much-publicised headline cut of 20.0mb/d.
According to Saudi Arabia oil minister, another supplementary measure towards rebalancing the oil market would be in form of increased purchases into Strategic Petroleum Reserves (SPRs). The next OPEC+ meeting is set for June 10.
In our view, the agreements as a whole have its positive and negatives and market reaction supports this view with Brent up only 0.8% at the close of Asian trading on Monday and up 1.4% today (as at time of writing). Also, we note that the deal and meeting proceedings have some far-reaching consequences. However, our immediate concerns include:
- Agreed cuts from G-20 & non-OPEC+ oil-producing countries are “freewill” cuts. This implies they are at liberty to renege on compliance.
- The “historic” cuts, particularly from the non-OPEC+ nations, would have happened anyway with demand expected to continue to decline.
- Mexico’s success at getting away with rejecting deeper cuts sets an unwanted precedent and creates further headache for Saudi Arabia in its oil market management quest.
- The deal is simply a market easing deal with soft demand expected to cap the gains in crude prices. In our view, we still see brent hovering between US$27/bbl. – US$35/bbl. Higher prices would be driven by quicker recovery in Crude oil demand and significant compliance to agreed cuts.
For Nigeria, the deal comes as very timely when the nation is faced with weak fiscal buffer and frail external conditions. The newly agreed cuts would see Nigeria’s oil production quota slump to 1.4mb/d from 1.7mb/d. With condesate production of 300kb/d – 400kb/d, total production would settle at 1.7mb/d – 1.8mb/d.
Although this revised quota is consistent with the revised budget benchmark of 1.7mb/d and US$30bbl, we believe the impact on IOCs remains negative given average production of crude oil cost of US$23.0/bbl. Overall, we think government revenues from oil receipts will be worsened by soft oil prices and a deeper cut in production.