A Shot in the Arm for Crude


Friday, December 11, 2020 / 10:44 AM /by FBNQuest Research / Header Image Credit: Fortune

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The price of UK Brent crude oil yesterday rose above USD50/b for the first time since March on positive sentiment around the new vaccines for the Covid-19 virus. Infections are soaring in many advanced economies and the inoculations have only started this week. Markets, however, can see a recovery in demand for crude ahead as travelers get back into their cars and into aircraft in large numbers, and industrial firms increase their production. Analysts of repute cannot come up with a convincing timetable but they can identify the outlines of the recovery. Further, they can reasonably assume that regulators will give the go-ahead for additional vaccines on top of the three already approved.


The vaccines are coming and OPEC+ has again shown relative discipline. The initial plan had been a reduction in its aggregate output restraint of 2.0mbpd to 5.7mbpd from 01 January but, having noted the fragile condition of demand for crude and of the global economy, it agreed earlier this week to a smaller cut of 500,000 b/d. Perhaps as a sweetener to those parties such as Russia pushing for a larger reduction, the agreement is subject to ministerial review on a monthly basis.


A recovery in oil revenues would be the fastest exit from Nigeria's current macro underperformance. A sustained increase would ease pressure on the public finances, the reserves, the current account and the naira exchange rate. It would also enhance the Nigeria credit story on the Eurobond circuit.


We have heard some confident talk of the prompt passage of a new industry bill by the National Assembly. We caution that, even if the president was able to sign a bill into law in the months ahead, the best possible impact on investment, production and government revenues would not be felt for at least three years.


Looking to the medium term and beyond, we argue that fossil fuels have better prospects than many commentators acknowledge. Life with Covid has reinforced the focus on climate change certainly, and some listed Western oil majors have made ambitious pledges on their carbon footprints.


Yet we should not overlook the pivotal role of state-owned oil and gas producers within OPEC+. Saudi Aramco springs to mind along with its Gulf allies and Russian producers, whether or not they have private shareholders, follow official policy. Such governments (including Nigeria) have plans for economic diversification. Oil and gas revenues will drive such plans, and the producers are expected to earn the revenues.


Average price of Bonny Light crude (USD/b)

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Sources: CBN; NNPC; FBNQuest Capital Research

Proshare Nigeria Pvt. Ltd.

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