Nigeria is not part of the OPEC + coup plot that planned to cut crude oil production by about 1.5 million barrels next month. This is because the country has been struggling to meet its OPEC quota of 1.8 million barrels per over time.
The country’s inability to achieve this stems from the serious security problems the industry has been faced with and also lack of investment industry.
For instance, Nigeria produced 1.3 million barrels per day of crude oil in February according to OPEC monthly report.
This is not discounting Nigeria’s underperformance to the tune of as much as 500,000 bpd, given its OPEC quota of 1.8 million bpd for the period under consideration.
OPEC, in the latest report also projected that world oil demand in 2023 will rise by 2.32 million bpd, or 2.3 per cent, unchanged from last month’s forecast.
The organization however stated that its crude oil output in February rose by 117,000 bpd to 28.92 million bpd, this was helped by a further recovery in Nigeria.
Despite the rise, OPEC is still pumping much less than called for by the OPEC+ agreement, as Nigeria, Angola and other members still struggle to reach their targets.
While there was marked improvement in output from Nigeria, Saudi Arabia and Congo, Angola and Iraq mostly underperformed in February, creating a drag on the cartel’s supply for the month.
Mele Kyari, the group chief executive officer of the Nigerian National Petroleum Company had admitted that Nigeria struggled to achieve its OPEC quota in 2022, stressing that the country had a “different challenge” from the rest of the world, as security issues undermined production.
Aside from security, industry analysts have also attributed lack of investment over time in the industry as a major contributor to the problem
Some OPEC+ countries on Sunday surprised markets with a voluntary cut of 1.15 million barrels per day (bpd) causing oil prices to rise and feeding inflationary fears.
According to Saudi Arabia, the voluntary cut is a precautionary measure aimed at supporting oil market stability.
If fully delivered, the announced cut would further tighten an already fundamentally tight oil market, driving the Brent benchmark towards $100 per barrel sooner than previously expected and would push the price to around $110 per barrel this summer.
The supply cuts, mostly to be shouldered by Saudi Arabia, are scheduled to start from May, which coincides with the refinery pre-summer season ramp up and an anticipated refined products demand rebound.
Before the new OPEC+ cuts were announced, Rystad Energy was anticipating the crude oil market to be in deficit to the tune of 1.4 million bpd between May and August.
The voluntary cuts, which the group had has a good track record of implementing, will put upside pressure on prices from a fundamentals perspective, offering support of around $10 per barrel.
Still, given the current macro environment, the market may interpret the cuts as a vote of no confidence in the recovery of oil demand and could even carry a downside price risk – but that will only be for the very short term.
These voluntary reductions are in addition to the current official OPEC+ cuts of 2 million bpd announced back in October 2022 for the period November 2022 – December 2023.
Saudi Arabia will shoulder most of the cuts, reducing production by 500,000 bpd.
Other participants are the UAE (144,000 bpd), Kuwait (128,000 bpd), Iraq (211,000 bpd), Oman (40,000 bpd), Algeria (48,000 bpd) and Kazakhstan (78,000 bpd), according to statements from their respective governments.
Russia also announced that the existing 500,000 bpd production cut, initially from March to June, will be extended till the end of the year.
However, a significant reduction in output from Russia for the rest of the year was already assumed in Rystad Energy’s base case scenario.
The fact that all these countries are adhering to the current OPEC+ quotas, with compliance levels at close to 100%, implies that the announced voluntary cuts will also most likely be real.
From a supply side perspective, the cuts signal the group is willing to defend a price floor well above $80 per barrel and prioritize revenue versus market share.
From a demand-side perspective, these cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market.
These recessionary indicators have been exacerbated by the ongoing strain on the banking industry which is weighing on the broader the financial sector.
Forward refinery margins are already weaker than prompt margins.
The cuts and the resulting crude price action are bound to compress the forward margins and run rates.
Refineries are coming out of maintenance and run rates are projected to increase by 3 million bpd between March to August to prepare for peak summer demand.
Hence, any erosion is crude supply will only make the summer product supply-demand balance tight, with a rally in product prices tracking crude.
Rystad Energy believes that these voluntary cuts will further tighten the oil market for the rest of the year and could push prices above $100 per barrel and keep them above that level for most of the rest of the year.
ICE Brent front month had declined from over $86 per barrel in early March to less than $73 per barrel by mid-March, its lowest since late 2021 amid the recent financial turmoil.
Since then, it has recovered almost halfway, nearly reaching $80 per barrel at the end of last week.
The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world.
That would, however, lower economic growth and reduce oil demand expansion.
Olusola Bello with report from Jorge Leon, Rystad Energy oil market update
