‘Potential cuts by OPEC to keep oil price above budget benchmark’

Though observers see the price of international oil benchmark Brent crude at anywhere between $59 to $70 per barrel for 2020, based on varying projections for supply, global demand and whether OPEC’s latest production cut deal will see full compliance from member states, Nigeria is hopeful that oil prices will remain above $57 benchmark.

The N10.59 trillion 2020 budget is based on an oil price benchmark of $57 per barrel, a daily oil production estimate of 2.18 mbpd and an exchange rate of N305 per US Dollar.

At 5:07pm in Nigeria, the front-month ICE Brent March crude futures were up 11% from Tuesday’s settle at $66.23/b, while the Nigeria’s Bonny Light dropped to $67.42 per barrel.

If the oil price drops below the benchmark, the country may explore the further borrowing options as taxes from household incomes remain low.

While the Minister of State for Petroleum Resources, Timipre Sylva has assured OPEC of compliance to cuts, there are concerns for the implementation of the 2020 budget if oil prices fall below proposed benchmark.

The U.S. Energy Information Administration (EIA) “forecasts Brent spot prices will average $61/b in 2020, down from a 2019 average of $64/b,” it said in a December release, putting U.S. benchmark West Texas Intermediate (WTI) prices on average $5.50 per barrel lower than Brent.

“EIA expects crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of next year,” the organization said.

Meanwhile,cCrude oil and condensate production in Russia hit a record high for the post-Soviet era in 2019, despite Moscow’s key role in supporting the ongoing production cuts of the OPEC+ coalition.
According to figures from Russia’s energy ministry, carried by Reuters, Russia pumped 11.25 million barrels per day (bpd) of crude oil and condensate in 2019—up from 11.16 million bpd in 2018, which was the previous production record in Russia’s post-Soviet era.

The new record oil production shows that one of the key parties to the OPEC+ deal, and certainly the key party in the non-OPEC camp of producers in the agreement, did not comply with its share of the cuts for most of 2019.

According to analysts’ reports quoting the latest inventory report from the API, US crude inventories fell 7.8 million barrels for the week ended December 27, which more than doubled analysts’ expectations of a 3.1 million barrels draw over the same period, a survey conducted by S&P Global Platts on Monday showed.

Meanwhile, total US gasoline stocks are expected to have added 3.7 million barrels, while distillate stocks are expected to rise 3.2 million barrels over the same period, the survey data showed.

Market participants will await the more definitive inventory data from the US Energy Information Administration, due to be published later Friday. Meanwhile, optimism from the OPEC output cuts also helped firm market sentiment, analysts said.

“Global oil benchmarks remain supported however as market fundamentals are projecting for a small supply-deficit over sharp production cuts by OPEC+ [in the first quarter of 2020],” said Benjamin Lu, investment analyst at Phillip Futures.

“OPEC+ has affirmed their commitment for the rebalancing of oil markets with production restraints…A renewal in global risk appetites will keep oil prices trending within the bullish channel for 1Q 2020,” Lu added.

In addition, the trade truce between the US and China was also supportive of oil prices.

“President Trump stated that the China deal is likely to be signed on January 15 and that P2 discussion would commence shortly after that. All of which should provide further impetus for traders to start the year off piling into the consensus long growth rebound trades,” Stephen Innes, AxiTrader’s chief Asia market strategist, wrote in a note Thursday.