Friday, February 14, 2020 /10:54 AM / By FDC / Header Image Credit: Reuters
At its recently concluded meeting in Vienna, the Joint Technical Committee for OPEC and its allies recommended a deeper production cut of 600,000bpd to cushion the effect of lower demand from China in the wake of the Coronavirus.
However, Russia, one of the world's largest oil producers, is requesting for more time to evaluate the impact of the deadly disease on oil demand. China is the world's largest importer of crude oil with an estimated consumption of 14mbpd. The outbreak of the coronavirus has seen China's oil demand decline by approximately 20%, thus driving down oil prices.
In the last two weeks, oil prices have fallen by approximately 16.46% on worries about the potential economic fallout of the fast-spreading Coronavirus. Brent prices fell to a 13-month low of $53.96pb on February 4th before recovering slightly to $55.28pb on the following day.
What to expect at the March Meeting
The Joint Technical Committee, which comprises of members from producing countries, is not a decision making entity but rather makes recommendations to OPEC and its allies. Given the current market fundamentals, we expect Russia to give in to the deeper cuts in the near term.
If this happens, it increases the chances of OPEC+ implementing the new quota cut at its March meeting. This will bring the total output cut to 2.3mbpd.
Impact on Nigeria
In the event that OPEC+ implements the new production cuts, member countries will have to reduce their oil production. This means that Nigeria's oil production could fall below 1.7mbpd, 21.66% below the budget benchmark of 2.17mbpd. Nigeria is highly susceptible to a fall in oil production and crude oil accounts for approximately 90% of Nigeria's total export.
Therefore, a further decline in oil production levels would result in lower oil proceeds, wider fiscal deficit and balance of trade deficit. Also, the pace of external reserves depletion could intensify, triggering currency pressure.