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Crude Oil

US$80 Per Barrel is Relatively Healthy – Coronation Merchant Bank

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Last week, Brent Oil briefly hit USD80/b rising by 43% when compared with USD55.9/b recorded at end-Jan 2021. This is also the highest level since October ’18. Oil prices have been rising as a result of supply disruptions and recovering demand due to the opening of economies, vaccination rollouts. Recently, global oil supply has taken a hit from hurricanes Ida and Nicholas passing through the Gulf of Mexico and damaging U.S oil infrastructure. This has contributed to the uptick in oil prices.

The decline in oil prices in 2020 can be largely attributed to the Saudi Arabia and Russia oil price war as well as the economic downturn triggered by the covid-19 pandemic. The pandemic had a severe impact on the global economy. It led to a persistent decline in international oil prices due to the global halt of major production and manufacturing, leading to a decline in demand for oil and a supply glut. Oil prices reached a five-year low of USD21.4/b in 24 April ’20.

According to the Organisation of the Petroleum Exporting Countries and its allies (OPEC+), global oil demand growth in 2021 is unchanged from its assessment in August ‘21.

However, the increased risk of covid-19 cases associated with the Delta variant have affected oil demand prospects, resulting in downward adjustments to Q4 ‘21 estimates.

Global oil demand in 2021 is estimated to average 96.7mbpd compared with the average threshold of 100mbpd. In September, non-OPEC liquids (i.e. petroleum products) supply growth in 2021 was revised down by 0.17mbpd. The revisions are mainly due to outages in North America from a fire on Mexico’s offshore platform and the disruptions caused by Hurricane Ida.

Nigeria’s bonny light crude oil price increased steadily from an average of USD42.1/b in 2020 to USD67.6/b at end-Sep 2021. We note that the oil economy accounted for 7.4% of the country’s real GDP in Q2 ’21, compared to 9.3% in Q1. Oil production has recorded declines of -25% y/y and -6.1%m/m to 1.24mbpd (excluding condensates) in August ’21 compared with the corresponding period in 2020.

Although Nigeria has the capacity to produce 2.5mbpd, average oil production ytd is c.1.35mbpd (excluding 300,000bpd of condensates). This is in compliance with the OPEC+ production quota and below the 1.86mbpd benchmark in the 2021 national budget.

There are several reasons for the suboptimal oil production level in Nigeria. The oil sector is faced with operational issues stemming from poor pipeline networks due to the country’s fragile infrastructure. We note that, over 500 vandalized oil assets were recorded between April ‘20 to April ‘21, significantly stunting production output. Furthermore, based on our estimate Nigeria’s average oil production ytd is 1.35mbpd compared with the current OPEC production quota of 1.6mbpd. Other reasons for suboptimal oil production include the low level of investments into the sector, operational constraints, lack of regulatory reforms, insecurity threats and social unrests in the oil-producing regions.

Ironically, rising oil prices might be a significant problem for Nigeria due to rising costs of the settlement of fuel subsidy receipts. According to the NNPC, to ensure continuous premium motor spirit (PMS) supply and effective distribution across the country, it has made deductions from its contributions to the federation accounts allocation committee (FAAC) in recent months. These deductions include N170.4bn in August, N114.3bn in July, and c. N126bn in June from its FAAC remittance. Over the past nine months, the NNPC contributed N349.3bn to FAAC.

Going forward, the global oil price outlook remains uncertain. However, the U.S. supply constraints are likely to continue to support oil prices, as Ida-related outages could affect U.S. supply till end-2021. Oil price is likely to remain well above USD60/b till end-2021. In consultation with the NNPC and other stakeholders, the budget office of the federation proposed a benchmark oil price of USD57/b for 2022. The underlying market fundamentals, global economic outlook and market sentiments were considered when computing this oil price benchmark.

The OPEC+ supply target for this year is yet to be achieved, some of its members including Nigeria still find it difficult to meet their oil production quotas. There is a need for Nigeria to tackle the current technical and operational challenges to boost production levels. On a brighter note, the recently passed Petroleum Industry Act (PIA) is likely to assist with providing a leg-up for the industry.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Climb as Markets Eye Potential US Rate Cuts in September

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Oil prices rose during the Asian trading session today on speculation that the U.S. Federal Reserve may begin cutting interest rates as soon as September.

Brent crude oil, against which Nigerian oil is priced, increased by 32 cents to $82.95 a barrel, while U.S. West Texas Intermediate crude oil climbed 34 cents to $80.47.

The anticipation of rate cuts stems from recent U.S. inflation and labor market data indicating a trend towards disinflation and balanced employment, according to ANZ Research.

The Federal Reserve is set to review its policy on July 30-31, with expectations of holding rates steady but providing clues for potential cuts in September.

The potential rate cuts could stimulate economic activity, increasing demand for oil. This optimism has been partially offset by recent concerns over China’s slower-than-expected economic growth, which could dampen global oil demand.

President Joe Biden’s announcement to not seek re-election and endorse Vice President Kamala Harris had minimal impact on oil markets.

Analysts suggest that U.S. presidential influence on oil production is limited, although a potential Trump presidency could boost oil demand due to his stance against electric vehicles.

In response to economic challenges, China surprised markets by lowering key policy and lending rates. While these measures aim to bolster the economy, analysts remain cautious about their immediate impact on oil demand.

With OPEC+ production cuts continuing to support prices, the focus remains on the U.S. Federal Reserve’s next moves.

Any decision to cut rates could further influence oil prices in the coming months, highlighting the interconnectedness of global economic policies and energy markets.

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Dangote Refinery Clash Threatens Nigeria’s Oil Sector Stability

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Nigeria’s oil and gas sector is facing a new challenge as a dispute between Dangote Industries Limited and the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) intensifies.

The disagreement centers on claims by NMDPRA that diesel from the Dangote Refinery contains high sulfur levels, making it inferior to imported products.

The $20 billion Dangote Refinery, located near Lagos, has the potential to process half of Nigeria’s daily oil output, promising to reduce dependency on foreign fuel imports and create thousands of jobs.

However, the recent accusations have cast a shadow over what should be a significant achievement for Africa’s largest economy.

Industry experts warn that the ongoing conflict could deter future investments in Nigeria’s oil sector.

“Regulatory uncertainty is a major disincentive for investors,” said Luqman Agboola, head of energy at Sofidia Capital. “Any factor affecting foreign investment impacts the entire value chain, risking potential energy deals.”

The regulatory body, led by Farouk Ahmed, maintains that Nigeria cannot rely solely on the Dangote facility to meet its petroleum needs, emphasizing the need for diverse sources.

This position has stirred controversy, with critics accusing the agency of attempting to undermine a vital national asset.

Amidst these tensions, energy analyst Charles Ogbeide described the agency’s comments as reckless, noting that the refinery is still in its commissioning stages and is working to optimize its sulfur output.

In response, Dangote Industries has called for fair assessments of its products, asserting that their diesel meets African standards.

The refinery’s leadership argues that certain factions may have ulterior motives, aiming to stifle progress through misinformation.

As the dispute continues, the broader implications for Nigeria’s oil sector remain uncertain. The outcome will likely influence not only domestic production but also the country’s standing in the global energy market.

Observers hope for a resolution that supports both industrial growth and regulatory integrity, ensuring stability in a sector crucial to Nigeria’s economy.

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Nigeria Pumps 236.2 Million Barrels in First Half of 2024

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Nigeria pumped 236.2 million barrels of crude oil in the first half of 2024, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

This figure represents an increase from the 219.5 million barrels produced during the same period in 2023.

In January, Nigeria produced 44.2 million barrels of crude oil while February saw a slight dip to 38.3 million barrels, with March following closely at 38.1 million barrels.

April and May production stood at 38.4 million barrels and 38.8 million barrels, respectively. June’s output remained consistent at 38.3 million barrels, demonstrating a stable production trend.

Despite the overall increase compared to 2023, the 2024 production figures still fall short of the 302.42 million barrels produced in the same period in 2020.

This ongoing fluctuation underscores the challenges facing Nigeria’s oil sector, which has experienced varying production levels over recent years.

On a daily basis, Nigeria’s crude oil production showed some variability. In January, the average daily production peaked at 1.43 million barrels per day (mbpd), the highest within the six-month period.

February’s production dropped to 1.32 mbpd, with a further decrease to 1.23 mbpd in March. April saw a modest increase to 1.28 mbpd, which then fell again to 1.25 mbpd in May. June ended on a positive note with a slight rise to 1.28 mbpd.

The fluctuations in daily production rates have prompted government and industry leaders to address underlying issues.

Mele Kyari, Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPC), has highlighted the detrimental effects of oil theft and vandalism on Nigeria’s production capabilities.

Kyari emphasized that addressing these security challenges is critical to boosting production and attracting investment.

Kyari also noted recent efforts to combat illegal activities, including the removal of over 5,800 illegal connections from pipelines and dismantling more than 6,000 illegal refineries.

He expressed confidence that these measures, combined with ongoing policy reforms, would support Nigeria’s goal of increasing daily production to two million barrels.

The Nigerian government remains focused on stabilizing and enhancing oil production. With recent efforts showing promising results, there is cautious optimism that Nigeria will achieve its production targets.

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