Oil prices jumped more than 3 per cent yesterday, consistently defying predictions of a surplus supply amid doubts about the ability of the Organisation of Petroleum Exporting Countries (OPEC’s) to respond to an increase in demand.
West Texas International (WTI) was trading up $3.04 (+3.89%) per barrel at $81.46 yesterday evening while Brent crude oil, Nigeria’s benchmark was trading up $2.76 (+3.80%) per barrel at $83.94, the highest level this year.
A day earlier, Omicron fears cast doubt over the short-term oil demand effects, particularly with China, one of the biggest consumers of Nigeria’s oil, which has a habit of aggressively locking down infected regions to slow the spread of the virus.
However, on Tuesday, the market had swung the other way on reports that OPEC+’s spare capacity will dwindle into the second half of the year as it gradually increases output targets between now and then at the rate of an additional 400,000 bpd each month.
The inability of OPEC+ to ramp up production as quickly as it has agreed to, is also lending support to crude oil prices which rose roughly 50 per cent last year, compared to 2020.
While the larger OPEC+ group has agreed to increase output at 400,000 bpd, it has been unable to achieve this volume in any month.
For December, the smaller OPEC group managed to increase output by just 70,000 bpd up from November, quite shy of the 253,000 bpd that was its share of the 400,000 bpd hike that OPEC+ agreed to.
OPEC+ has agreed to increase another 400,000 bpd in February, but as OPEC+ increases production each month to varying degrees, its excess capacity dwindles, diminishing OPEC’s ability to respond to increased demand.
Nigeria and Angola are the biggest culprits in Africa, having consistently failed for months to meet its OPEC allocation. There are also production challenges in Libya which has been embroiled in some turmoil.
While Nigeria’s quota for February remains at 1.701 barrels per day, it has in the last few months struggled to produce roughly between 1.250 million barrels per day and 1.3 million barrels per day.
While the target is to produce about 1.86 million barrels daily by the Nigerian National Petroleum Company (NNPC) Limited, poor upstream infrastructure, long term waning investment and the impact of the OPEC induced shutdowns last year, have combined to hobble the number of barrels pumped by Nigeria.
Promises by the Minister of State, Mr. Timipre Sylva and the NNPC Group Managing Director, Mallam Mele Kyari, that the country would hit between 1.7 million barrels per day and 1.8 million barrels per day by the end of 2021 remained largely unrealised.
On the dollar front, the dollar weakened in part because traders were wary of December inflation data that is set to be released today (Wednesday), and in part due to anticipated interest rate hikes by the federal reserve.
Nigeria has been losing the desperately needed foreign exchange to under-production and its intractable payments for petrol subsidy.