OPEC Cut, COVID-19 and 2021 Budget

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Zainab-Ahmed
Minister of Finance, Mrs. Zainab Ahmed

This year is already showing signs that are similar to last year’s, when COVID-19 pandemic hit the world. What is worse, the new variant of the virus seems to be coming with a force that may make the 2020 dark days a child’s play, as countries are already considering lockdown. This means that the demand, supply and the price of crude oil will take another lethal hit. In response, the OPEC+ alliance has deepened oil production cut and this will set Nigerian share of supply by over 300,000 barrels per day in three months. Clearly, the Nigerian 2021 budget will now have to contend with the oil production cuts and COVID-19, in order to make the budget to work for Nigerians. Chris Paul reports

Within two days, between 30 November and 1 December, 2020, the 108th meeting of the Organisation of Petroleum Exporting Countries (OPEC) debated whether to maintain its supply cuts as at last year’s levels, or increase output as planned for 2021, worried that should the group not come through, the fourth quarter rally in crude prices could be destabilized.

Even though there was a unanimous agreement on the proposed three-month delay, consensus about the precise terms of the extension could not find a common ground among delegates who attended the four-hour video conference.

Still unresolved, at the virtual conference, according to a Bloomberg report, were questions of compliance with pledged cuts and compensation from countries that had exceeded their supply limits.

Although, UAE and Kazakhstan, two of the coalition’s major players did not back maintenance of the existing curbs into the first quarter, most member countries were said to be support the plan.

With growth pegged at minus 4.3 per cent for 2020, the global economy was, clearly deep in the hole of recession.

As the second wave of the pandemic and related lockdowns put a damper on demand, global oil demand for 2020 is expected to decline by around 9.8 mb/d; as disclosed in the opening remarks of Algeria’s Minister of Energy and President of the OPEC Conference, Abdelmadjid Attar, during the meeting, which held in Vienna.

Warning of the long and bumpy road to recovery, he advised that great patience was required; but enthused that, “However, there are signs of light at the end of the tunnel. Next year (2021), the global economy is forecast to return to growth, expanding by an estimated 4.4 per cent. Oil demand growth is expected to be high, in the tune of 6.1 mb/d. This brighter outlook for 2021 gives us a cautious optimism and is a clear indication that we are on the right path.”

Since the beginning of the Covid-19 pandemic, Production quotas had been reduced to account for lower demand for oil as improbability led to instability in the oil market with a severe descent in prices.

While the lifting of restrictions had resulted in partial market rescue, re-implementation of lockdown around the globe has driven demand down again.

Recent end to major hostilities in Libya revved up the country’s production dramatically; prompting worries by observers that these two factors may further destabilize the market with the resulting oil glut.

Consequently, majority of OPEC and OPEC+ members (including Russia and nine other countries) advocated a continued reduction in production quotas to avoid surpluses.

The call led to an oil production cut of about 9.7 million barrels per day by OPEC and its alliance countries OPEC+, for an initial period of two months that concluded on 30 June 2020, from 1 May 2020. Impressed with the outcome of that measure, the alliance agreed to another six months extension of the cut between 1 July 2020 and 31 December 2020 with a commitment to sustain production cut of 7.7 mb/d.

In compliance to the cartel’s agreement, Nigeria agreed to a production cut of 1.412 mb/d till June 2020, which would later be increased to 1.495 mb/d between July 1 and December 2020; with the intention to shoot production up by 84,000bpd to 1.579 mb/d from January 2021 to April 2022, excluding condensates.

The continuation of the deal, starting January 2021, which would see members maintain cuts of 5.8 mb/d for 16 months ending 30 April 2022, caused divisions within the group, which Russia and some other countries rejecting the cuts.

The Russians insisted on having more output, arguing that unless OPEC Plus keeps pace with the recovery of demand, the group will lose market share to shale oil producers in the United States. The Russians also appear to be more optimistic about the recovery of demand for oil.

Although they have been wary of easing the production cuts agreed to by the group in April which helped shore up prices back from their spring ebb; Saudi’s worry was hinged on the fact that the pandemic still far from abating.

Thankfully, on Tuesday, 5 January 2021, they were able to arrive at a compromise with Saudi Arabia obliging to drop its oil production by one million barrels a day, just so Russia and Kazakhstan could get the production increases they insisted on. This gesture, which the Saudi offered to stabilize the market, was warmly welcomed by Traders.

Consequently, the impact on the market was an over 4per cent rise in oil prices reaching a record high not seen since February; giving some bounce to Brent which shot beyond $53/barrel, with West Texas Intermediate exceeding $50.

The initial challenge in arriving at a consensus, at the OPEC Plus meeting, gives the impression that cooperation between the cartel’s de facto leader, Saudi Arabia and Russia had once more come under intense pressure. However, Observers of the alliance fear the tension could, in months to come, herald hitches in restraining production.

All this OPEC drama and increasing market volatility amid the second wave of coronavirus will most certainly have a debilitating effect on the Nigerian 2021 budget.

Recall that the crude oil price benchmark in the 2020 budget began with about $57 per barrel. Following the sharp decline in the world market crude oil prices, Bonny Light crude oil price dropped from a peak of $72.2 per barrel on 7 January 2020 to below $20 per barrel in April, 2020.

Compelled to revise the benchmark in the budget, initially to $30 per barrel, the government had to, later, reduce it to $25 per barrel, and finally landed it at $28 per barrel. Notwithstanding the review, tangible incomes in oil revenues, between January and May, increased by 66per cent (N278.2billion) to N701.6billion.

This year, Finance Minister, Zainab Ahmed, said part of the funding for the budget would come from the export of 1.86 million barrels per day oil output at about $40 per barrel.

The minister said out of a net accrual to the Federation Account of N6.67 trillion (after 0.5per cent transfer to Police Trust Fund), total oil revenue, after all costs, deductions and derivations would come to about N4.09 trillion.

With the current OPEC cuts, Nigeria’s share is 313,000bpd and that means Nigeria will be losing a total of $1.48 billion in potential oil sales in three months at an average price of $50 per barrel.

OPEC’s decision to increase crude oil production output by 500,000 barrels per day for February and March, 2021, at its 13th OPEC and non-OPEC Ministerial Meeting (ONOMM), see Nigeria cut production by an additional 939,000 barrels per day.

This is in observance to the OPEC+ resolution, with reference production set for the country by OPEC put at 1.829 million barrels per day in January, February and March.

But the required production per month will be 1,516 million barrels per day, a reduction of 313,000 barrels per day for each of the months.

The loss of the 313,000 bpd will greatly affect the economy and destabilized liquidity. According to KPMG’s outlook on Nigeria’s 2021 economy, oil production is expected to be negative, Year-on-year, at least in the first half of 2021 due to deep OPEC cuts, as well as new lockdowns and restrictions. And so, some of the obstacles Nigeria will experience in the near-term include an uncertain foreign-exchange (FX) environment, constrained productivity, cautious private-sector investors, socio-political threats and high inflation.

What is worse, Nigeria would have to hope and pray that the entire world do not join United Kingdom (UK) to go into an another lockdown as the deadlier variant in the second wave of COVID-19 is currently overwhelming nations’ healthcare facilities that are barely recovering from the first wave. As its impact continues to subject economies to severe strain, Western nations that are the most affected may actually resort to a shutdown; and that means Nigeria may not even be able to sell the oil within the period, as it happened during the last lockdown.

So, as it stands, Nigeria’s economy is on a ‘hold your breath’ mode and by extension, Nigerians have to brace up for a similar harsh experience they went through during the lockdown.