The production policies of the non-member countries of the Organisation of Petroleum Exporting Countries (OPEC+) and pandemic’s path will continue to drive global oil prices in the year and result in global oil demand declining marginally in the first quarter (Q1) of 2021, as many regions, including many European countries, re-introduce mobility restrictions, global rating agency Fitch Ratings, warned at the weekend.
Nigeria, Africa’s largest oil producer and member, OPEC, relies heavily on crude oil earnings to fund its national budget. Experts say a decline in global oil demand would inevitably stifle the implementation of this year’s N13.588trillion budget assuming three per cent annual growth, oil prices of $40 a barrel and 1.86 million barrels a day of crude production.
Fitch said the OPEC+ oil production policies and the pandemic’s path would continue to drive global oil prices in 2021.
“Although demand remains subdued because of the coronavirus pandemic, oil prices have increased materially since October 2020 due to OPEC+ production cuts, reduced oil inventories and increased investor optimism, supported by the vaccine roll-out in many countries,” it said.
However, the agency warned that oil prices could still come under pressure, particularly in the first half of 2021 “before effective vaccination programs are fully underway.”
“The positive effects of vaccination programmes on the oil demand recovery may not be visible for several months until a critical mass of population is inoculated,” Fitch said, adding that mass vaccination is likely to lead to a sustainable improvement in oil demand, although there is some uncertainty about the effectiveness of the vaccines against the most recent virus mutations.
Oil prices continued to lose gains having reached 11-month highs, as investor fears over weak demand are fueled by negative vaccine results, while a higher US relief package hopes limit price declines.
International benchmark Brent crude traded at $54.74 on Friday, posting a 0.18 per cent decrease from Monday when it traded at $54.84 per barrel.
American benchmark West Texas Intermediate (WTI) traded at $51.75 at the same time on Friday, relative to $52.23 a barrel on Monday.
While the number of cases worldwide has now reached over 97.6 million, according to the latest data from Johns Hopkins University, investors have been keeping tabs on a large rollout of COVID-19 vaccines to the global population, with expectations of a recovery in oil consumption to pre-pandemic levels.
However, the vaccination of the elderly resulted in unexpected deaths in some countries, including Germany, the US and Norway, and cast doubt over the safety of the vaccines and of prompt economic recovery to negatively affect oil demand.
A rise in locally transmitted coronavirus infections in the world’s second-largest oil consumer, China, added to oil demand fears, as the country tightened lockdowns and imposed restrictions to battle the spread of the virus.
The country, which handled the first outbreak of the pandemic to eradicate any cases for many months, saw refineries in the country hit record production in 2020 despite worldwide weak oil demand caused by the coronavirus pandemic.
According to data from the National Bureau of Statistics of China, the country processed three per cent more crude oil than in 2019.
Investors are also closely monitoring the inauguration of US President Joe Biden, as he is expected to announce a $1.9 trillion aid package.
Soon after his inauguration, Biden announced his strategy to combat the COVID-19 outbreak and promised that he would do his best to approve the support package as soon as possible.
While the International Energy Agency (IEA) forecast that the global oil demand would increase by six per cent in 2021, the agency also said an acceleration in economic activity and stronger demand is only expected in the second half of the year and not until the widespread vaccination of a certain number of the population is made.