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.
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.
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.
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.
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 an associate 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.
“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.”
Central banks digital currencies pose a threat against the U.S dollar
In general, digital currencies could weaken the power of U.S. sanctions and the ability of the U.S. Treasury to watch illicit financial flows.
A new report by America’s biggest bank, JP Morgan Chase, said the U.S dollar is being faced with a major threat as many central banks’ digital currencies continue to gain traction.
Analysts, including Josh Younger, the head of U.S. interest-rate derivatives strategy and Michael Feroli, the chief U.S. economist, wrote in a report saying this:
“There is no country with more to lose from the disruptive potential of digital currency than the United States.
“This revolves primarily around U.S. dollar hegemony. Issuing the global reserve currency and the medium of exchange for international trade in commodities, goods, and services convey immense advantages.”
Aditi Kumar and Eric Rosenbach also recently penned an opinion piece for Foreign Affairs in which they noted that “Just recently, America’s arch-rival China became the first major economy to carry a real test of a national digital currency.”
In general, electronic currencies could weaken the power of U.S. sanctions and the ability of the U.S. Treasury to watch illicit financial flows. A digital Chinese currency (yuan) combined with China’s developed electronic payment systems may give China more future influence than it ever bargained for.
What Nigerians should know about Digital currencies
A digital currency is a cash balance recorded electronically on a store value card or other physical devices, which could someday replace the physical notes of the naira, for instance.
Digital currencies can be decentralized, that is where the control over the cash supply can come from diverse sources. Digital currencies can also be centralized, where there is a midway point of control over cash supply, just like the way central banks work.
Although JP Morgan does not see the U.S dollar being overthrown as the world’s reserve currency anytime soon, experts warned that the U.S dollar dominance could weaken. This is because its processing trade settlement and the SWIFT system could make it more vulnerable.
The American bank continued by saying:
“Offering a cross-border payment solution built on top of a digital dollar would, particularly if designed to be minimally disruptive to the structure of the domestic financial system, be a very modest investment to protect a key means to project power in the global economy,
“For high-income countries and the U.S. in particular, digital currency is an exercise in geopolitical risk management.”
Federal Reserve Chairman Jerome Powell said months ago that the Federal Reserve was taking a critical view on the issues regarding a digital currency.
Dollar gains against major currencies
U.S dollar stood firm against major currencies on Monday as fears over rising tensions between America and China over Beijing’s plans to begin
The U.S dollar was up on Monday morning during London’s trading session after protests in Hong Kong yesterday escalated U.S-China tensions.
US dollar stood firm against major currencies on Monday as fears over rising tensions between America and China heightened.
The American Dollar Index that monitors the U.S dollar against a basket of other major currencies was slightly up 0.02% to 99.945 by 11.10 am Nigerian local time.
What it means: Nigerians hoping to meet a foreign exchange payment obligation, transactions via the dollar to countries like Europe, Japan, would have the need to pay fewer dollars to fulfill such transactions.
Meanwhile, the friendship between the Americans and Chinese has soured lately since the outbreak of the COVID-19 pandemic. US President Trump and President Jinping of China have traded words against each other issues surrounding COVID-19, including accusations of lack of transparency and cover-ups.
Consequently, the U.S. Commerce Department added 33 Chinese businesses to a blacklist on Friday, and some U.S. Senators proposed sanctions on those businesses.
“The biggest concern is the tension between the United States and China, things were already bad, and it is likely to get worse because of the Hong Kong security law. This supports risk-off trades, which is positive for the dollar and the yen,” Tekuya Kanda, the general manager of research at Gaitame.com Research Institute, told Reuters.
Air Peace to evacuate stranded Indians from Lagos to Kerala
A list of the passengers to be attended to has already been given and the flight shall depart Lagos on May 30, 2020, to Cochin Airport, Kerala.
The management of Air Peace Nigeria has been contacted by the Indian High Commission in Nigeria to undertake the evacuation of stranded Indian nationals to Kerala, India. This was disclosed by the airline via its Twitter handle.
The airline explained that a list of passengers that would be attended to have been released and it has started reaching out to the Indians on Saturday.
It stated, “A list of the passengers to be attended to has already been given to us and we have commenced reaching out to them. The flight shall depart Lagos on May 30, 2020, to Cochin Airport, Kerala.”
The flight is not free anyway. According to the airline, payments are expected immediately and they are Economy is $1.300 and Business class is tag $1,700. “You are equally allowed to pay in Naira at N460/$,” it added.
PUBLIC NOTICE (23-05-2020) pic.twitter.com/bn0xNxnRmO
— Air Peace (@flyairpeace) May 23, 2020
However, some Indians in Nigeria has reacted with mixed feelings to the development on Twitter. While some were ready to join the flight back home, others called for the refund of ticket fare booked a week ago.
For instance, Jayant Khamesra requested for the refund ticket fare of N568, 100, which he paid for a flight from Lagos to Delhi.
He said, “Please refund ticket fare P47812 LAGOS to DELHI. No show by Air Peace and it is been 1 week now, there has been no refund or confirmation of the same. Reference ALHN79 amount N568,100. I am sure a good world-class carrier like Air Peace won’t delay refunds purposely. Please act fast.
Pls refund ticket fare P47812 LAGOS to DELHI – NO SHOW by AirPeace and it’s been 1 week now —- there has been no refund or confirmation of the same. Reference ALHN79 Amount 568100 NGN. Am sure a good world class carrier like AIRPEACE won’t delay refunds purposely. Pls act fast
— Jayant Khamesra (@JKhamesra) May 23, 2020