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Thursday, October 22, 2020

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After months of dwindling demand and fluctuations in crude oil prices, which had crashed below $0 at a point, oil has now witnessed a resurgence in the last six days. Also, most countries are carefully reopening their economies after weeks of global lockdown.

As the world slowly moves towards resuming normal economic activities, oil industry players will be focused on how quickly things get back to shape. An uptick in economic activities signified by a return of public transportation, air travel, and reopening of factories will brighten the light at the end of the tunnel for oil prices. Some international oil experts have however argued that oil prices could only witness a surge later this year. According to them, an average of $35-40 per barrel might be possible by the end of the year.

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For instance, a Norwegian consultancy firm Rystad Energy had stated that about $100 billion is expected to be cut in 2020 from E&P budgets, and that would, no doubt, be a negative development. The firm warned that if oil prices stayed below $30 per barrel in 2021, the total cut could reach $150 billion.

Rating agency Moody is a bit more optimistic, expecting a bounce in oil prices, but only in the medium term.
According to berry commodities group, oil prices in the long term will range from $50 to $70 per barrel. In the short term, Moody is less optimistic and sees the effects of CAPEX cuts trickling down from E&P companies to oilfield service companies (OFS).

How oil firms trim costs

Already, the ICCs are adjusting to the oil price crisis. For instance, last week, the Dutch-British oil and gas major Shell announced the reduction of its underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels. It also announced a reduction of cash capital expenditure to $20 billion or below for 2020, from a planned level of around $25 billion.

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In its own case, French oil major Total has also cut organic CAPEX by more than $3 billion, while planning savings of $800 million on operating costs in 2020 from $300 million announced earlier, along with a suspension of its buyback program.

Unlike the American supermajor ExxonMobil whose further cuts are in the pipeline, ConocoPhillips has started to cut its 2020 capital program by approximately 10% or $700 million, while Chevron targets $2 billion in cost savings. The IOCs aren’t the only ones suffering; with a financial crash in US shale, Canadian shutdowns, and of course, the OPEC deal.

Oil prices surge …

The oil futures in the New York exchange, which once traded below $0, was around $24 per barrel in Asian trading on Friday. This represents a 20% increase this week. Also, the Brent crude, which is around $30.15 per barrel, has had a 15% price increase in the last week. Nigeria’s Bonny Light also stands at N24.93, an increase of 10.16% as at Friday afternoon.

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It was reported earlier that Saudi Arabia’s oil giant Aramco raised the price for all its crude oil grades to all regions for June, in a move that many analysts see as the start of demand recovery. This also hints that OPEC+ has started to cut production with the aim to stabilize the market.

But has the rebound come to stay? 

Oil experts have described the surge as a welcome development driven by some factors. Director, Centre for Petroleum, Energy Economics and Law, Prof. Adeola Adenikinju, told Nairametrics in an exclusive interview that the development is hinged on a combination of demand and supply factors.

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According to him, the reopening of global economies is bringing increased demand for energy services, thereby driving up oil demand. In addition, the cut in oil supply by OPEC+ members has also lowered excess demand in the market, as the global oil inventory figures have also shown some tentative positive signs.

On whether the surge has come to stay or not, he said, “If the rally would be sustained is still uncertain. This is because the fundamentals of the market have not changed significantly. Economies are opening up, however, the recovery is gradual and will take some time for economic activities to resume to pre-COVID-19 levels.

“There is uncertainty around the V-shaped recovery that has been predicted in some circles. In particular, the major source of global demand for oil, transportation, in particular, air transportation, is still largely under lockdown. International travels, tourism, etc., will not remain the same again, even when the vaccine is found.”

Adenikinju, who is also one of the trainers of Delphi Ventura, US-based petroleum and energy-based consultancy firm, added that the daily commuting for work would also not remain the same, as employers accept the reality of working from home, and online meetings take centre stage.

If the surge continues, the oil experts expect the price of Nigeria crude oil, the Bonny light, to stay above $35 for Q3 and Q4, 2020. “It will pick up to mid-$40s or low $50s in 2021. However, Nigeria may not be able to fully take advantage of the increase because of production cuts that OPEC+ would need to maintain to sustain the market.

“Moreover, at higher prices, many of the shale oil producers would come back to the market and drive supply. Nigeria will also continue to face competition in its traditional market from other global suppliers, and reduce demand as some countries are using the Covid-19 pandemic to restructure their economies away from fossil fuels to renewable energy.

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“The smart thing for Nigeria is to accept the reality that it will not be business as usual and find a way of increasing domestic value addition of its petroleum sector locally. We need to reduce costs of governance, and open up the economy for greater domestic and foreign investments,” he added.

Meanwhile, another oil expert, Chief Operating Officer, Oando Energy Resources, Ainojie Irune, urged stakeholders and Nigerians to stay optimistic, even as they see some casualties along the way to a rebound.

In an interview on CNN’s ‘First Move’ with Julia Chatterley, he explained that while most oil producers are currently battling with costs that they have very little control over, it is important for all to stay optimistic. He gave reasons why the surge could be sustained:

“We’re seeing an uptick in the price, we are seeing the decision by OPEC to cut 10 million barrels come in to realise the intention of OPEC; they’ve taken that huge step. But more importantly, the Government is stepping in to ensure that Independents like ourselves are engaged in conversations to ensure that process of survival, which is indeed a process for us, unknown as well, is managed jointly, to see that it takes the least amount of time to see a recovery.”

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