The Organisation of Petroleum Exporting Countries (OPEC) and its allies including Russia are considering more aggressive output cut after reviewing data that suggest that coronavirus impact on oil markets could be worse than previously thought.
The cartel and its allies met on Tuesday in Vienna for a technical meeting to discuss possible action following the coronavirus outbreak, according to reports from the Wall Street Journal based on interview with cartel officials.
For Africa’s biggest oil producer, deeper cuts are ominous. Nigeria’s production has already been capped at 1.7 million barrels per day but it is counting on financing the 2020 budget on a production of 2.18 million barrels per day.
OPEC officials say a final decision may be reached next week after another round of meetings.
The 14-member OPEC and its 10-nation allies led by Russia had initially considered cutting 500,000 barrels a day but do not look capable of denting the problem with slow demand from China.
The Asian superpower accounts for at least 14 million barrels per day consumption. Since the outbreak of the virus, Chinese oil demand has dropped by about 3 million barrels a day, or 20 percent of total consumption, sending prices south.
The outbreak of the pneumonia-like coronavirus has left over 14,000 people infected and over 400 dead since the first case was reported on December 30 in Wuhan, the capital of China’s Hubei province.
According to the Wall Street Journal Report, one projection, which assumes the virus outbreak will be severe and last six months, suggests the market would be oversupplied by 1 million barrels a day in the second quarter if the cartel and its allies fail to act. To counteract this, the alliance would therefore have to cut output by 1 million barrels a day, but by no more than that.
Another scenario foresees a more moderate impact, resulting in a projected excess of 800,000 barrels a day in the second quarter, they said – meaning the alliance would have to cut output by at least 800,000 barrels a day and by no more than 1 million barrels a day.
The scenarios forecast demand growth being slashed by between 202,000 and 124,000 barrels a day for the full year, the officials said. Under either scenario of production cutting for the second quarter, OPEC is likely to ease its curbs later this year to avoid undersupplying markets.
Nigeria’s N10.59 trillion 2020 budget is benchmarked on a daily oil production rate at 2.18 million per barrel, with assumed oil price of $55 per barrel.
In his budget speech, President Muhammadu Buhari said the sum of N8.155 trillion is estimated as the total Federal Government revenue in 2020 and comprises oil revenue of N2.64 trillion, non-oil tax revenues of N1.81 trillion and other revenues of N3.7 trillion.
Some analysts say this kind of budget projection could lead to budget underperformance. If OPEC and its allies agree to cut production by 1 million barrels per day, Nigeria could see its cap lower than 1.7 million bpd which could further impair the revenue projections in 2020 budget.
“It seems that our budgetary assumptions are overly ambitious,” said Chuks Nwani, energy lawyer based in Lagos. “The reality suggests that our budget projections should be modest so that they can be achievable.”
The concern for Nigeria, according to analysts, is that the fundamentals that should drive taxation from non-oil incomes are not strong.
Saudi Arabia, OPEC’s de facto leader, is pushing for the cartel and its oil-producing allies to make a deep, short-term production cut as it seeks to stem the oil-price slump driven by the virus. But Russia and some members are unwilling to deepen cuts further so as not to cede markets to the United States which is ramping shale oil production.
