•Supply constraint, fading COVID-19 fears drive up prices •Nigeria leads OPEC’s underperformance
Oil prices traded within striking distance of its seven-year high at $86.71 per barrel yesterday on continuing supply constraints and waning fears among heavy fuel users of another pandemic-induced slowdown.
In the last two weeks, Brent, Nigeria’s benchmark, has climbed more than 10 per cent to as much as $86.71 a barrel, exceeding last October’s high, to levels not seen since 2014 when oil topped $115.
On the other hand, the United States oil marker, the West Texas Intermediate (WTI) has risen more than 12 per cent since the start of the year, to hit a high of $84.78, just under last year’s peak.
Nevertheless, the rising oil prices is more of bad news for Nigeria which should ordinarily earn more foreign exchange from the sale of crude, but now has to deal with paying more for petrol subsidy which had been described as a drain on its economy because there’s a positive relationship between the international prices of the commodity and how much Nigerians get the product at the pump.
In the meantime, some analysts are forecasting that the crude benchmarks would trade at more than $100 a barrel again this year unless there is a significant increase in supply.
The Organisation of Petroleum Exporting Countries (OPEC) and its allies had stuck to a plan agreed in July last year to replace output cut at the start of the pandemic gradually, by just 400,000 barrels a day each month, despite calls by major crude oil consuming nations like the United States to increase production. Generally, the strategy has helped oil prices move higher since August, and to recover quickly after the rapid spread of the Omicron coronavirus variant in November.
However, even at that, not all members of the OPEC+ group, including Nigeria have been able to hit their monthly targets, meaning the cartel has been increasing output by slightly less than its monthly target.
THISDAY recently reported that Nigeria’s continuing inability to pump enough crude oil, in part, resulted in the overall failure of OPEC to meet its target production for last month.
Whereas the target for Nigeria was 1.67 million barrels per day for last month, it only managed to produce 1.44 million barrels per day in December and 1.49 million barrels the previous month, using secondary sources.
The development has widened the gap between OPEC+ crude oil quotas and production as the group’s steady plan to loosen its pandemic cuts, once again outpaced actual output gains.
Nigeria has been struggling for months with meeting the quota allocated to it by OPEC due to ageing infrastructure as a result of years of under-investment in the upstream of the oil and gas sector.
Added to these are vandalism and sabotage, technical issues as well as difficulties with restarting oil wells the country shut down last year in the heat of the Covid-19 pandemic.
But despite the limitation, the largest individual increase was in West Africa, where Angola boosted output by 90,000 bpd to 1.2 million bpd. Although this was the highest monthly level of 2021, Angola was still 190,000 bpd below its December quota.
West Africa also saw the biggest individual decline last month, with Nigerian output tumbling and defying state-owned Nigerian National Petroleum Corporation (NNPC) Group Managing Director, Mallam Mele Kyari’s forecast that the country would reach its target by the end of last year.
On December 22, the National Assembly approved a N17.126 trillion ($38 billion) budget for 2022, anchored on an oil price benchmark of $62 per barrel.
The approved oil price assumption was higher than the $57 per barrel price that President Muhammadu Buhari had proposed to the parliament on October 7, and also higher than the oil price benchmark of $40 per barrel adopted by the government for the 2021 budget.
In addition, Nigeria retained the oil production target of 1.88 million bpd, including condensate production of between 300,000-400,000 bpd, for the purpose of its revenue calculation in 2022.
This is as compared to the output target of 1.86 million bpd the government had set for the 2021 fiscal year.
In addition, frantic oil buying, driven by supply outages and signs the Omicron variant of COVID-19 will not be as disruptive as feared for fuel demand, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained a while longer.
A Reuters report quoted unnamed sources yesterday as saying that China plans to release oil reserves around the Lunar New Year holidays between January 31 and February 6 as part of a plan coordinated by the United States with other major consumers to reduce global prices.
Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday it is the prerogative of the US government whether to release supply from the strategic petroleum reserves.
Kyari said recently that if the prices of oil rise too quickly and too high, it would be bad for Nigeria as its customers may likely look for alternatives to the commodity.
Meanwhile, oil analysts have raised their oil price forecasts for the first quarter of 2022, expecting demand to outpace supply.