The Nigerian National Petroleum Corporation (NNPC) says it is optimistic the global oil market would achieve full recovery by third quarter of 2021.
This is in the aftermath of crude oil price decline at the international market which is making a slow but steady climb towards pre-COVID 19 levels.
Following declining oil prices in the wake of the outbreak of the Coronavirus pandemic, both the World Bank and the International Monetary Fund have warned that the global economy was headed towards another recession.
The Nigerian economy, which is 80 per cent dependent on oil, has been massively impacted, with government undertaking adjustments of the 2020 budget benchmarks.
But, if the oil market indeed recovers by the third quarter of 2021, indications are that Nigeria’s economy may be making a quicker recovery than what most economic analysts are anticipating.
In the last couple of days, crude oil price has climbed to an average of $40-$42 per barrels on the back of a massive intervention by the Organisation of Petroleum Exporting Countries (OPEC) and its allies in the non-OPEC group led by Russia.
In May, OPEC and its allies under the OPEC+ agreed to cut supply by up to 10 million barrels per day between May and June 2020 in an attempt to strengthen the price and stabilise the crude oil market.
Apparently seeing the impact of the intervention, with the price gradually rising, the group agreed last week to extend the initiative to the next phase, till the end of July 2020, and to cut about eight million barrels per day of supply between July and December 2020.
Another six million barrels per day would be cut in the final phase of the intervention between January 2021 to April 2022.
Meanwhile, the Group Managing Director of the NNPC, Mele Kyari, told Bloomberg on Tuesday that if the current situation was sustained, the oil market might attain full recovery by the third quarter of next year.
Mr Kyari said Nigeria saw the OPEC+ output cut initiative as an opportunity to wait for the rebalancing of the oil market, to halt her continued spending to produce oil for free due to supply-demand inbalance.
“We have started seeing signs that the output cut initiative is working and achieving its target objective by pulling down the supply and creating a situation that will bring up price to a level we can recover our cost and make some marginal profit to continue in our business,” he said.
With the continuous rise in crude oil price in recent days, he expressed optimism that by the end of June or latest mid-July, the discount offered to buyers to take Nigeria’s oil would no longer be necessary.
Although the NNPC boss said Nigeria experienced “marginal under-compliance” initially with the OPEC output cut quota by less than 100,000 barrels per day, the country is currently at an over-compliance position in the last 10 to 15 days.
His projection is that by the end of June, or mid-July in the worst case scenario, Nigeria would see full compliance with the OPEC output cut quota.
To sustain the price rally in the market, Mr Kyari said the expectation was for all OPEC member-countries to continue to cooperate to bring some normalcy before the end of the year, and see a flat out price at $42-$45 per barrel at the end of the year.
The short-term response of the market as a result of the OPEC+ intervention, he noted, has been positive, with prices recovering from below $22 per barrel in April to the current level of $40 per barrel.
If the current level of $40 per barrel for the Brent crude oil is sustained, he said, the potential was there for it to grow to an average of between $42 and $45 per barrel by the end of the year.
“I don’t think we will see any $30 per barrel in the near future if this situation is sustained. Everybody is seeing the benefit of creating the balance in the market. It is in the interest of all members to comply.
“Nigeria’s decision to comply with the OPEC output cut deal was a decision we made as a country, and not influenced by any other country’s decision on the matter,” he said.
On cost of production, Mr Kyari said with some NNPC assets producing oil at less than $30 per barrel, “selling at an average of $40 and $42 per barrel leaves Nigeria in a comfort place.”
He said, at the moment, NNPC is already cutting cost in its operations, with a target of bringing the cost down to $10 per barrels by the end of 2021.
To ensure the cost-cutting is industry wide, the NNPC Chief said the corporation has always insisted that all its partners and suppliers also cut their costs by 30 to 40 per cent.
On the prospects of the NNPC escaping job cuts this year, he said considering that a review of the heavy cost centres has been carried out, it would help to bring costs down to normal levels and avoid job cuts.
Beyond the job cuts, he said the major concern of the company and its partners was how to sustain the improved efficiency level attained in the last couple of months.
He said despite the impact of the COVID-19 pandemic on the global economy, Nigeria, with a large informal economy, was not completely locked down like some countries “that were brought down to the zero level.”
The pandemic, he said, has not resulted in a massive decline in the country’s gross domestic product (GDP) like other countries.
“What this means is that our consumption and local demand will grow and come back to normal much faster than most jurisdictions. The biggest risk will be to restore demand for oil back to pre-COVID 19 level as we look forward to the second half of the year,” he said.