Emmanuel Addeh in Abuja
Oil prices remained under pressure yesterday, on the back of continuing Libya’s output and threats by the United States, Japan, China and India to release their Strategic Petroleum Reserves (SPR) to cool rising prices.
Although the price has been bearish for weeks, Nigeria, however, does not appear to be in trouble as the country has for months been earning about $40per barrel (pb) above its oil benchmark of $40 in its 2021 budget.
In the last seven weeks, Brent, Nigeria’ benchmark oil, has lost about $8, having almost touched $87 in October, but has come under serious threat as the COVID-19 situation in Europe worsens, raising concerns about both oversupply and weak demand.
On Monday, Brent lost 26 cents, or 0.3 per cent, to hit a low of $78.63 a barrel while United States oil, West Texas Intermediate (WTI) crude futures were down 12 cents, or 0.2 per cent, at $75.82 a barrel.
But rising dollar earnings hasn’t done much to ameliorate the scarcity of the greenback in the country, as much of the extra funds have gone into payment of petrol subsidies.
Nigeria’s 2021 is predicated on a crude oil benchmark price of $40 per barrel, with production for this year estimated at 1.86 million barrels per day.
However, Nigeria has continued to under-produce its Organisation of Petroleum Exporting Countries (OPEC) quota allocation essentially due to ageing upstream infrastructure as a result of years of under-investment as well as difficulty in restarting oil wells that were shut down last year in a bid to comply fully with the oil cartel’s mandatory cuts.
Even with falling oil rates, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, recently said there was no cause for alarm, stressing that Nigeria was most comfortable with a price range of between $50 to $60.
This , he said was to ensure that buyers of Nigeria’s crude oil do not find cheaper alternatives as a result of skyrocketing oil and gas prices.
Japan and a number of other countries have in the last few weeks signalled their readiness to help combat soaring oil prices following a request from the United States to release oil from their emergency stockpile, in an unprecedented move.
The White House has continued to press the OPEC producer group to maintain adequate global supply, days after discussions with some of the world’s biggest economies over potentially releasing oil from strategic reserves to quell high energy prices.
In a note at the weekend, Citibank analysts stated that the combined SPR release could be 100 million to 120 million barrels or even higher, including 45 million to 60 million barrels from the United States, about 30 million barrels from China, five million barrels from India and 10 million barrels each from Japan and South Korea.
“If released over December and January, this could mean looser markets by some 1.5-2.0 million bpd. This would be against the backdrop of expected stock draws of 2.8 million bpd in Dec’21 and 0.5 million bpd in Jan’22 without any SPR release,” Citi stated.
Aside the heightening production from Libya and threats to open up reserves, further weighing on prices is possible renewed lockdowns in Europe as COVID-19 cases surge again and as Germany warned it may need to move to a full lockdown after Austria said it would re-impose strict measures to tackle rising infections.
Meantime, US bank Goldman Sachs, is sticking to its forecast that Brent will average $85 per barrel this quarter, arguing that this month’s decline in oil prices has been driven by an “excessive wall of worries” and has “overshot” the actual fundamental risks.
In its view, the fall has “far overshot the actual fundamental risks due to low trading volume”, the bank said in a note to investors.
“Our pricing model shows that the $8/bl price decline since late October is equivalent to the market pricing in a 4 million bpd combined hit to demand or increase in supply over the next three months,” the bank said.
“We therefore view the move as excessive, especially as the oil market remains in a large deficit, and reiterate our $85/bl 4Q21 average forecast,” the bank added.
It said that inventory data point to an imbalance in supply and demand of around 2 million bpd over the last four weeks.
“This magnitude of deficit is in fact on its own sufficient to absorb the current perceived headwinds to the oil bull thesis, with lower prices in fact reducing the odds of a strategic release,” it said.
