In the just concluded week, crude oil prices increased given the commitments made by the Organisation of the Petroleum Exporting Countries (OPEC) and their allies to cut crude oil supply by 9.7 million barrels per day through the end of June 2020, from May 1, 2020; the production declines in non-OPEC countries; and as governments across the globe began subtle easing of lockdown in their countries.
Specifically, Nigeria’s sweet crude variant, bonny light, rocketed by 79.80% to USD34.09 on Wednesday, May 20, 2020, from USD18.96 it printed on Thursday, April 30, 2020. Also, the crude price of the OPEC basket jumped month-to-date by 72.09% in May 2020.
On the supply side, the strong adherence to output cut pledges by OPEC+ and the declining production in non-OPEC countries, have helped to stem the increased crude oil production, that has failed to attract buyers due to the negative impact of COVID-19 pandemic on countries’ economic activities, especially in the United States. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell wo-w by 0.94% to 526.5 million barrels.
Also, the International Energy Agency (IEA) said that massive cuts have been coming in faster than it expected from countries outside the OPEC+ agreement. It noted that output from this group moderated by 3 million barrels per day (MB/d) in April 2020, than what is printed at the beginning of the year; and the drop in volume could further increase to 4mb/d in June. This, Coupled with full compliance by OPEC+ to their agreed 9.7 MB/d supply cut, the Agency expected a reduction in global crude oil supply cut to reach 12 mb/d, month-on-month, in May 2020.
Similarly, OPEC revised the non-OPEC oil supply cut downwards by 3.5 mb/d to average 61.5 Mb/d in its May 2020 edition of OPEC Monthly Oil Market Report. According to the report, the revision was based on production curtailment plans announced by oil companies, especially in North America.
To further rebalance the oil market demand and supply, on Tuesday, May 12, 2020, Saudi Arabia, the UAE and Kuwait announced that they would voluntarily depress oil output adjustments from June, by 1 MB/d, 100 thousand barrels per day (tb/d) and 80 tb/d respectively.
In addition to the expected massive reduction in global supply, on the demand side, the gradual relaxation of restrictions in some countries also supported the recent increase in crude oil prices.
Particularly, demand glimmered in the world’s largest crude oil consumer, the United States, where Crude Oil Input to Refineries rose week-on-week by 0.89% to 12.76 MB/d as at May 15, 2020, while Refinery Capacity Utilization ticked higher to 69.4% from 68.9% in the preceding week.
According to IEA’s report, the number of people living under some form of confinement at the end of May 2020 would drop to about 2.8 billion, from its recent estimate of 4 billion people. Meanwhile, Nigeria’s crude oil supply to the international market averaged at 1.8 MB/d for the first four months in 2020.
We expect Nigeria to benefit largely from the significant increase in crude oil prices given that the larger part of the country’s revenue and foreign earnings are derived from the sale of crude oil; although, the benefit is still subject to the eventual sale of the crude as the supply of crude oil still outweighs the demand at the international market.
Meanwhile, we note that the gradual recovery in crude oil prices is fragile as the strong market reaction to economic activity might be too early, given that the major uncertainties still remain. The big question is, will the ease in lockdown not spark a resurgence of COVID-19 outbreaks? Thus, the answer to this question, in addition to the level of compliance by the OPEC+ will determine the sustainability of the rise in crude prices. However, with the recent positive news on potent vaccine in US, we feel the end to the pandemic may be near.
Cowry Research
