The latest production quota released by the Organization of Petroleum Exporting Countries (OPEC) shows the group and its allies eases production cuts by 1.14 million barrels per day from May through July 2021. Following serious deliberations, the group and its allies reached an agreement to reduce production cuts to 6.55mb/d in May, 6.20mb/d in June and 5.76mb/d in July, marking an average of 6.17mb/d for the three months compared with 7.13mb/d as of March.
The decision was an offshoot of the gradual recovery witnessed in the global economy. The body however agreed to maintain a cautious stance to adjust numbers should market conditions turn south. Nigeria is expected to take production cuts of c.0.29mb/d in May, c.0.28mb/d in June and c.0.25mb/d in July 2021 compared to an average of c.0.31mb/d in Q1 2021. Given the importance of oil receipts to Nigeria's foreign earnings, the tapered production cut bodes well for the economy.
Notably, the strict production controls by OPEC and its allies coupled with rising oil demand amid improving global macroeconomic narrative has moved oil prices to pre-covid levels after plunging to historic lows in 2020. Worthy of note also is Saudi Arabia's voluntary cut of 1.0mb/d which started in February 2021 through March and the mass rollout of vaccines that have helped to propel bullish trend in the market. In Nigeria however, despite constituting more accretion to its external reserves, the rise in crude price has pressured the Nigerian consumer given how it translates into higher petrol prices following what appears like a full/partial removal of petroleum subsidy.
Considering the foregoing, the recent move by OPEC and its allies reflects two scenarios for the Nigerian economy. Firstly, the ease in production cuts bodes well for the government's revenue purse in the light of weak fiscal buffer and frail external conditions. On the other hand, with scaling back of the OPEC+ cuts of 7.1mbpd to 6.2mbpd from May through July, there is a mild level of uncertainty on where brent price could head albeit we remain optimistic. In the full glance of the cited scenarios, we reiterate that revenue diversification efforts should be top of the agenda of government at this time. Until this is achieved at a decent scale, the country's economy vis-a-vis oil receipts will remain susceptible to the volatile nature of the global oil market.