Fears of what could be a looming global recession have roiled markets and spooked investors, Bismarck Rewane, Chief Operating Officer (COO) of Financial Derivatives Company (FDC) has said.
Rewane said, if this happens, it would be the third global recession in the last 10 years. Loretta Mester, the President of the Federal Reserve Bank of Cleveland, has warned that the Omicron variant could put further pressure on supply chains and worsen worker shortages. The uncertainty surrounding the Omicron variant has sent the price of brent crude down 19 per cent to $68.87pb – its lowest level in 15 weeks. All the same, OPEC+ is staying the course, but looking over its shoulder.
For Nigeria, it is a double-edged sword as lower oil prices would be negative for export revenues but would lead to a lower price of petrol. Conversely, if oil price rebounds, the government would be confronted by a higher fuel subsidy bill. OPEC+ chose to continue its current plan to increase oil production by 400,000bpd each month. But if oil price stays very low, OPEC+ might have to revisit this strategy.
Based on the communique released at the end of the OPEC+ Ministerial meeting, OPEC+ reaffirmed its monthly production adjustment plan, raising overall production for January 2022 by 0.4mbpd.
This came despite fresh threats to global oil demand by the Omicron (B.1.1.529) variant of COVID-19 and the possible release of strategic oil reserves by the US. Nonetheless, the cartel noted it would continue to watch market developments and make immediate adjustments if required.
With this decision, the overall output quota for members and allies was effectively raised to 40.5mbpd for January 2022 (December 2021: 40.1mbpd). Similarly, Nigeria’s production quota increased to 1.68mbpd from 1.67mbpd.
Analysts at Afrinvest Research said, “in our assessment, the new developments in the oil market might not be favourable for Nigeria despite the increase in the oil production. We note that the outbreak of the Omicron variant – said to be resistant to existing vaccines and more virulent than previous mutations – has spooked the oil market with Brent futures slipping below $70.00/bbl. on December 1 for the first time since late August 2021”.
This decline in output owing to shut-ins amid ongoing repairs and maintenance at critical oil facilities including Forcados and Qua Iboe (jointly accounting for c.25 per cent of total oil and condensates production) has hampered Nigeria’s capacity to benefit from the relatively high oil price. Based on the latest OPEC data, we estimate that output gap rose to 225,000bpd in October from 180,000bpd in September on account of lower oil production (-3.2 per cent to 1.35mbpd in October).
Another downside risk to the global oil price outlook in the near term is the planned release of 50.0 million barrels from the US strategic oil reserves in a bit to temper high energy costs and ease inflationary pressure in the US. In its latest monthly report, OPEC revised its global demand forecast for 2021 to 96.4mbpd, 0.2mbpd lower than its October forecast. For Nigeria, we estimate output gaps of 299,000bpd and 298,000bpd for November and December 2021 as we expect subdued domestic oil production to persist.
