Crude Price Boosted By Voluntary Cut


Wednesday, January 13, 2021 / 08:50 AM / by FBNQuest Research / Header Image Credit: CNBC

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The price of UK Brent crude oil has continued to firm over the past month. Having risen above USD50/b on 10 December for the first time since March on positive sentiment around new vaccines, it crossed the USD55/b threshold last week on the latest decision on production by the OPEC+ grouping. The cut in output from quotas running up to April was trimmed from 7.7mbpd to 7.2mbpd for January, and has now been reduced again by 75,000 b/d for the combined benefit of Russia and Kazakhstan in both February and March. (On close examination we see from the table provided by OPEC that the benefit amounts to 65,000 b/d for Russia and 10,000 b/d for Kazakhstan.) The crude price has been boosted by a separate voluntary cut, not shown in the table, of 1.0mbpd by Saudi over the two months.


We will have to revisit our forecast of an end-2021 price for UK Brent of US$53/b now that vaccination has started in the largest advanced economies. The next three months are likely to be painful for households and economies (other than in China) yet it is hard not to see a healthy recovery in global demand for crude in H2 '21.


A recovery in oil revenue would be the fastest exit from Nigeria's current recession: an easing of pressure on the public finances, reserves, the balance of payments and the naira exchange rate as well as a boost to the feelgood factor. The OPEC table has Nigeria's required output at 1.52mbpd throughout Q1.


One theory has it that Big Oil is uncomfortable with a Democrat in the White House. President-elect Biden has a well-known position on climate change generally. That said, he surely would not wish the US to be heavily dependent again on foreign oil. 


Talk of 'peak oil' and carbon neutral footprints in our view overlooks the reality that many large fossil fuel producers are state-owned, and not under pressure from shareholders with an ESG agenda. Rosneft of Russia has such minority investors but nonetheless plans to invest USD135bn on a huge prospect in the Arctic. Vostok Oil will require 15 new towns to be built, and could tap up to 6 billion mt crude.


Rosneft has set its own climate goaks but these fall short of the pledges made by the likes of BP, Shell and Total. It is not alone in its stance on production and climate change. The thinking at Saudi Aramco and Pemex of Mexico is probably not very different. 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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