Nigeria will on Thursday join some of the world’s largest oil producers, under the auspices of the Organisation of Petroleum Exporting Countries (OPEC) and allies known as OPEC+, to decide on production policy beyond March as the cartel seeks to cool a rapid rally in crude prices.
The group will consider rolling over oil production cuts from March into April instead of raising output because of fragile oil demand recovery due to persisting worries about the coronavirus.
The cartel has endured a year of pain, dominated by the deepest output cuts in its history. But the sacrifice has paid off, reviving oil prices back to pre-crisis levels above $60 a barrel.
However, there are distinct elements to the production increase OPEC and its allies will debate this week.
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Will Saudi Arabia extend cuts?
A key question is whether Saudi Arabia will decide to extend its voluntary cuts beyond March 2021.
Saudi Arabia always said that its voluntary supply reduction would only last for two months, but seasoned OPEC-watchers have suggested that Riyadh could phase it out gradually.
The kingdom will start to roll back its extra cut as planned in April, but is still discussing internally whether to return all of the barrels in a single month or over a longer period, said people familiar with the deliberations.
During a speech at the International Energy Forum early this year, the Saudi energy minister indicated that producers should remain cautious and vigilant of market changes.
Furthermore, the UAE energy minister has indicated in a statement that the amount to be released by the group will hinge on the pace of global vaccination campaigns, calling for increasing production in a phased manner.
Even if OPEC+ agrees on the 1.35 million bpd production hike, the market would be willing to see what policy Saudi Arabia would follow regarding its current voluntary cuts beyond March.
Expectations from OPEC allies led by Russia
From the Russian side, the market expects Russia to be pushing for a 1.35 million bpd production hike as per the original agreement.
Russian Deputy Prime Minister Alexander Novak has indicated on several occasions that oil markets are currently in balance, implying producers should return supply that’s currently being held off the markets.
According to Rystard Energy, one scenario is that the group may decide to bring 1.35 million bpd back into the markets by April, bringing total cuts down to around 5.8 million bpd.
“Under this scenario, we expect prices to retreat below the $60 level, a scenario that the Russians may advocate,” Rystard Energy said.
Another scenario is that the group may decide to ease cuts gradually by less than 1.35 million bpd with gradual ease of Saudi cuts.
“Under this scenario, we expect prices to stay within the $60-$65 range,” Rystard Energy said.
Impact of US inventories and demand level
Another major challenge facing Thursday’s meeting is the impact of United States’ inventories.
In February, US oil inventories stood at 463 million barrels, only 19.7 million barrels above their level before the pandemic, while US oil production is at 9.7 million bpd facing a large decline due to the oil freeze seen in Texas.
US oil demand is also almost back to pre-crisis levels, as seen by the recorded demand for petroleum products at 18.69 million bpd, 1.18 million bpd below their levels a year ago.
These numbers may provide yet another incentive for OPEC+ to ease output cuts.
Nigeria’s condensate confusion
Nigeria’s full compliance with the OPEC+ deal has been contingent on a key oil grade being treated as a condensate.
“Nigeria will continue to comply with OPEC cuts but will pump more condensate to make up for the reduced crude production,” managing director of Nigerian National Petroleum Corporation (NNPC), Mele Kyari, said at a recent webinar.
The current output cuts by OPEC and its nine non-OPEC allies are focused on crude and not condensate but the categorisation of Nigeria’s Agbami grade continues to be a bone of contention.
Nigeria’s oil ministry insists it is a condensate but international oil companies like Chevron and Equinor, which have equity in the deepwater Agbami field, continue to classify it as ultra-light crude.
Agbami has an API of over 47.9 degrees and a sulfur content of 0.04 percent, with production averaging 150,000 b/d in 2020, according to Platts estimates.
Agbami is a popular grade among global refiners and is regularly exported to a wide array of countries like India, Australia, Spain, the Netherlands, China and Brazil.
Nigeria pumped 1.43 million bpd in December, below its 1.495 million bpd quota, according to the latest S&P Global Platts OPEC+ survey. December production was 70,000 bpd down from November and its lowest level since August 2016.
It was Nigeria’s highest-ever compliance since the OPEC+ alliance began its output deal in 2017, according to the survey.
