The price of crude oil is expected to become bullish and climb to $60 per barrel in the next 12 months as demand is projected to recover, while the OPEC+ is expected to take operational decisions, according to projections by a multinational investment bank, Citigroup.
The New York-based financial services corporation made this known on Thursday during a virtual EMEA Media Summit with the theme- ‘Navigating the Future: What’s Next in a Post-COVID-19 World’.
“After a substantial underperformance in the last six months relative to several other commodities, crude will eventually bounce back to around $60 per barrel over the next 12 months,” Max Layton, European Head of Commodities Strategy, Citigroup said while giving a presentation on the outlook for commodities in the second half of 2020, and into 2021.
With the projections by Citigroup, the crude price would see an upside of around 50 percent from the current 12 month forwards Brent WTI prices of around $40 per barrel.
“That kind of percentage upside is very difficult to find elsewhere across commodities complex except for perhaps, Silver,” Layton said.
An increase in crude price would be good news for Nigeria, Africa’s top producer who recently revised its 2020 budget due to the impact of lower crude price on its revenue.
Nigeria’s economy, which emerged from a recession in 2017, was already contending with low growth of around 2 percent before oil prices plummeted.
Africa’s top oil exporter who relies on crude sales for around 90 percent of foreign exchange earnings and more than half of government revenue recently slashed it the crude benchmark for the 2020 budget to assume an oil price of $28 per barrel from the initial $57.
While crude prices have doubled since hitting a two-decade low in April, climbing past $40 a barrel on Thursday, it has remained lower than its 2020 record-high of $62 in January.
On the rationale behind Citigroup’s forecast, Layton said there has been a collapse in Capex in crude and the commodity has had the most significant demand impact and the supply is responding.
“We have seen demand collapse, price collapse and now you are seeing supply responding. The oil industry has quite a high decline rate and the US, Saudi Arabia and Russia are not happy with $40 crude,” he said adding that the price is not a comfortable position for anyone, so there is going to be some “degree of policy port coming from the oil producers as they are likely to maintain cut.”
On the expected crude production cut by the commodity producers, Citigroup executives said it expects a supply cut of about 7-10 million amid rebalancing which is expected to play a significant role in driving crude demand recovering.
“It’s going to be a function of the demand and supply but recently we have been seeing a spike in the demand for some of the commodities,” Atiq Rehman, Head of EMEA Emerging Markets, Citigroup said.
The effect of lower oil prices coupled with the impact of COVID-19 on the Nigerian economy is the basis for the country’s growth outlook which is expected to be a contraction of about 5 percent in 2020.
“A lot of these economies are heavily commodity-dependent, and perhaps, in the past have been guilty of not diversifying when they come under pressure. I think perhaps, this recent moves will push them to diversify away from simply commodities,” Grant Carson, Head of TRUK And Non-Presence Countries, Citigroup said citing Russian as one of the countries that have recorded success in diversifying away from crude oil.
According to him, like Russia, which has recently made effort to rebuild its manufacturing sector while also looking at other areas of its economy to support the oil price, “I think we would see more of that and I think that’s where some of the growth opportunity will potentially come from and that is an opportunity for emerging markets.”
On the emerging markets that are mostly at risk of COVID-19 and that are likely to see sudden stop in investment inflow, executives of Citigroup covering EMEA said countries where there is no faith in how they have managed the COVID-19 crisis at the one that will take most hit.
“If you can’t have people showing up in the factory to make something for you to sell, that is when I think you are most at risk. Single operation economy that is not diversified are mostly at risk,” Carson said.
On investors’ sentiment towards Nigeria amid the outbreak of the deadly coronavirus which has infected 26,484 persons in the country with the highest population in Africa, Akin Dawodu, Head of Sub Saharan Africa, Citigroup said it’s a mixed reaction.
“Investors’ sentiment for Nigeria is positive in some aspect and not in some others. Portfolio investors are distinct from direct investors and Nigeria has had a lot of portfolio investors and you see portfolio investors’ boom in good time but in times like this, you don’t see that” Dawodu said, adding that Nigeria’s government needs to find a better balance between portfolio and direct investment inflows.
Despite acknowledging the government for Nigeria’s progress in ease of doing business Dawodu said “they would have to purse ease of doing business in a more aggressive and timely way,” because that is what will attract the more remarkable investments.
