Hope of Economic Rebound Hinges on Rally in Crude Prices – CSL
Analysts have explained that hope of economic rebound largely hinged on sustained rebound in crude prices as the Organisation for the Petroleum Exporting Countries and allies (OPEC+) agree to raise oil production.
Following yesterday’s meeting, OPEC and other oil-producing nations led by Russia reached a deal to modestly increase production in January amidst a raging second wave of the corona virus pandemic though with the prospect of vaccines offering some hope.
Based on the agreement, members of the Organization of the Petroleum Exporting Countries along with Russia and other countries will raise production gradually by 500,000 barrels a day over a 3month period starting in January.
CSL Stockbrokers stated in a note that the increase, though less than 1% of the global oil market, comes amidst a second wave of corona virus which is currently weighing on demand.
According to reports, analysts said the agreement was a compromise between countries that wanted a much larger increase of two million barrels a day, which was previously agreed on, and others that would prefer to maintain current production cuts of about 7.7 million barrels per day.
The latter are considering the many uncertainties around the pandemic and the possibilities that demand will remain low.
That said, CSL said the disagreement between both groups suggests that agreed quotas may not be adhered.
Looking ahead, analysts are expecting the modest increase in OPEC+ production and the prospects of discovery of effective vaccines to remain positive for oil prices in the short term if production cuts are adhered to.
“We however expect the rally in oil prices to be capped by subdued growth in the global economy which would continue to limit the pace of recovery in oil demand”, CSL stated.
For Nigeria, CSL said a combination of both higher oil prices and lower production cuts is needed to fund the country’s 2021 budget.
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Recalled that Nigeria’s budget 2021 is predicated on a production volume of 1.86mpd and oil price of US$40 per barrel.
Amidst a recession, CSL maintains that the hope of an economic rebound is largely hinged on sustained rebound in crude prices as the country has suffered a significant slump in revenue largely due to weak oil revenue.
Furthermore, it said the economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves.
