Oil’s remarkable rise to pre-pandemic levels could be big catalyst for Nigeria
One year after the first glimmers of the catastrophe awaiting global oil markets — from deserted Chinese cities to grounded jets — crude is staging a remarkable turnaround.
And it could be time soon to begin to reconsider the outlook for oil dependent economies like Nigeria where acute foreign exchange scarcity has become the order of day and public finances hit hard in the last one year since the pandemic.
The oil price crisis triggered by the deadly coronavirus was the worst the petroleum industry has ever seen.
Fuel demand crashed by a fifth, prices slumped below zero, producers fought viciously over customers, and more than a billion surplus barrels poured into storage tanks around the world.
The crisis came with a pounding for economies like Nigeria’s where rising budget deficit and the resulting massive borrowing have shot debt service bill to a crushing 25% of annual appropriation.
The budget deficit for 2021 could top N6trn with Africa’s biggest economy expecting to borrow an unprecedented N5trn this year. The first signs of oil’s resurgence to look out for will be any significant addition to Nigeria’s foreign reserves which today stand at $36.1bn.
Yet oil’s emergence from the calamity has truly been stark. On Monday, futures rallied to a one-year high above $60 a barrel in London as Chinese consumption surpasses pre-virus levels, the vaccine rollout restores confidence, and the OPEC cartel and its allies keep a tight leash on supply.
With western economies still pounded by a high death toll and lockdowns, demand for transport fuels — particularly in aviation — remains depressed.
But it’s roaring for the petroleum products that cater to a society working and consuming at home — ones that power ships, make plastics, and fire up space heaters.
“The recovery is proceeding at a faster rate than people perceived,” said Ed Morse, head of commodities research at Citigroup Inc. “The demand recovery is going to look stellar. The inventory draw is significantly greater than what many people thought.”
For countries like Nigeria, Iraq and Angola, which have sought aid from the International Monetary Fund to quell economic crises, it’s a lifeline. Even wealthier exporters like Saudi Arabia consider the extra revenue crucial.
The strongest sign of the recovery is one of the most esoteric — a price structure known as backwardation. Near-term futures contracts have built up a sizable premium relative to later months, indicating immediate supplies are tightening fast.
One gauge watched closely by crude traders — the difference between contracts based on North Sea Brent crude settling in December versus those a year later — has surged to a two-year high of $2.84 a barrel.
That’s a signal for refiners to dig into the huge stockpiles that built up during the worst of last year’s demand slump. These inventories are plunging everywhere, from major depots in the U.S., China and the United Arab Emirates to the tanker fleet once commandeered to house spare barrels at sea.
Global inventories have declined by about 300 million barrels since the Organization of Petroleum Exporting Countries and its partners made deep production cuts in May, the International Energy Agency estimates.
The cartel projects that it will deplete another 82 million barrels this quarter, pushing stockpiles in industrialized nations down to their five-year average by August. Bloated inventories weigh on oil prices, so eliminating the overhang could pave the way for a further recovery.
“We are drawing stocks,” said Ben Luckock, co-head of oil trading at Trafigura Group in Geneva. Prices have recovered well and “can seriously perform come summer both in crude and in products.”
One of the forces driving this rapid turnaround is the rebound in oil consumption, particularly in Asia.
“Not only did China have a V-shaped recovery from the coronavirus pandemic, but they’re actually back into significant growth mode,” Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden said in a Bloomberg television interview last week. “We are quite optimistic about what it is that we are seeing in China.”
The world’s biggest crude importer’s success at containing the coronavirus has allowed a rapid resumption of economic activity. Government data showed a record stockpile decline in December as processing volumes increased.
In India, fuel consumption has inched back toward normal levels as the spread of the coronavirus prompted the use of more cooking fuel and gasoline. Overall, the nation’s oil-product demand in December was 1.4% lower than year-ago levels, provisional data from its oil ministry showed.
Asia’s resilience is only part of oil’s comeback. It’s being amplified by less obvious sources of strength that can be summed up as freight, chemicals, and cold.
Still there are a “plethora of demand uncertainties,” said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd.
“We see the market still balancing between Covid-driven demand destruction and OPEC’s ability to manage supply cuts,” said Torbjorn Tornqvist, chairman and CEO of Gunvor Group Ltd. in Geneva.
