OPEC+ ministers met for four days last week and agreed to ramp up production by a marginal 500,000bpd following assent by participating countries to the Declaration of Cooperation (DOC). Since the relaxation of lockdowns, expansion in general economic activity has increased oil demand, mostly emanating from Asia.
Oil prices have also been bolstered by positive vaccine news surging higher by 15.2% in the last month. On the downside, the rise in caseloads in Europe has halted demand in that region as nations adopted lockdowns to curb another wave of the virus.
Rising oil prices and production recovery is a welcome positive for oil-exporting countries like Nigeria. However, we note that the increase in agreed production levels is marginal (with cuts reduced to 7.2mb/d from 7.7mb/d previously), thus capping any production recovery gains anticipated with OPEC+ firmly concerned with potential supply-side disruptions such as rising inventories- US inventories which are currently higher its 5-year average.
Other supply-side concerns, such as increased Libyan production (production is up to 1.0mbpd, from 0.1mbpd in August 2020) and a Biden presidency may also lead to an increased supply of Iranian crude in the market. These factors are expected to depress oil prices in 2021.
Locally, Nigeria remains overly reliant on oil receipts (40% of dollar inflow) to maintain exchange rate stability. In addition, the 2021 budget has an oil price benchmark of $40/bbl., and projected oil revenue makes up about c. 50% proposed budget.
Lastly, banking portfolios remain heavily exposed to stability in the oil sector. That said, we maintain the view that Nigeria’s monotonous economy remains very susceptible to volatility in crude prices.