A fresh hope for oil producing countries such as Nigeria, and Algeria was raised at the weekend as oil prices hit the highest level since early March after major producers agreed to a cautious increase in output that eased fears of oversupply.
Russia and the Organisation of Petroleum Exporting Countries (OPEC) forged an agreement to boost oil supply by 500,000 barrels a day (bpd) from January, which was a quarter of what they had agreed to previously.
The development sent prices up. Brent crude, the international benchmark, rose 1.1 per cent to $49.28 a barrel, slipping in New York trading after hitting a high of $49.92 earlier in the day. United States marker West Texas Intermediate (WTI) climbed 1.3 per cent to $46.26.
The Federal Government’s proposed aggregate revenue and expenditure budgets for 2021 are N7.89 trillion and N13.08 trillion, resulting in N5.02 trillion fiscal deficit. The deficit will be financed mainly by new borrowings totaling N4.28 trillion, N205.15 billion from privatisation proceeds and N709.69 billion from drawdowns on multilateral and bilateral loans secured for specific projects and programmes.
According to KPMG newsletter, budget estimates a daily oil production estimate of 1.86 million barrels per day (mbpd) (inclusive of condensates of 300,000 to 400,000 barrels per day), about three per cent increase over the revised 2020 budget. Given the actual daily oil production of 1.80 mbpd as at June 2020, the proposed production volume for 2021 may be a realistic expectation.
The estimated benchmark oil price of $40 per barrel is fixed at a conservative and realistic price following the current fluctuations of oil prices (within $39 – $43 per barrel). Non-oil revenue target in the 2021 budget proposal at ¦ 1.49 trillion represents a 46.8per cent decline from the 2020 approved budget and is 56per cent lower than the 2017 target of ¦ 3.4 trillion.
It appears that the Federal Government has, in drafting the budget proposal, considered the effect of the COVID-19 pandemic on Nigerian businesses.
The budget estimates an exchange rate of ¦ 379 per US Dollar, projected Gross Domestic Product (GDP) growth at three per cent and inflation closing at 11.95per cent. With a six per centy decline in real GDP in the second quarter of 2020, and a projected negative GDP in the third quarter of 2020, an estimated GDP growth of three per cent in 2021 may be ambitious.
“The oil price is being supported by technical factors” such as the supply agreement and a weaker US dollar, said Monica Defend, head of research at fund manager Amundi.
“Developed markets remain in the grip of the second wave of the pandemic, and this is reflected in poor demand for travel,” she cautioned.
“We do not expect to see oil at $55 until the second half of next year, on the basis that [coronavirus] vaccines can be widely distributed and aeroplanes are back in the sky.”
A weaker dollar boosts crude prices because it makes it cheaper for holders of other currencies to purchase the commodity. But expectations of an oil price recovery after the pandemic vary widely, with OPEC bullish on consumption while forecasts from oil producers and airlines suggest a peak in demand is close.
The dollar index, which measures the buck against trading partners’ currencies, was unchanged in Friday afternoon trading, hovering around a two-and-a-half-year low.
On Wall Street, the S&P 500 index was up 0.6 per cent, led by energy shares, putting it on pace for another record high. The technology-focused Nasdaq Composite rose 0.5 per cent.
The yield on 10-year US Treasuries, which has climbed quickly in recent weeks as the positive mood on markets prompted investors to sell off the haven asset, rose 0.05 percentage points to 0.97 per cent, equalling November’s intraday high. A month ago, this yield was below 0.8 per cent.
On Friday, one portion of the yield curve, which tracks the difference between 2-year and 10-year Treasury yields, widened to its largest gap since 2017, at 0.82 percentage points.
Data from Bureau of Labour Statistics showed the US added 245,000 new jobs in November, far below the 469,000 posts expected by economists polled by Reuters.
The weaker than expected payroll number would usually jolt markets, said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, except investors were looking beyond the current economic data.
“People are already very, very optimistic and when there is weakness, the market will look through that because they are thinking about the vaccine and economic normalisation,” he said.
Lifting market sentiment were also signs of progress in talks between US lawmakers about a second stimulus package for the world’s largest economy. On Friday, Nancy Pelosi, the Speaker of the House, said there was “momentum” towards a deal.
In Europe, London’s FTSE 100 index, which has heavy weightings of oil producers, miners and commodities traders, closed 0.9 per cent higher. The region-wide Stoxx Europe 600 benchmark added 0.6 per cent while Germany’s Xetra Dax gained 0.4 per cent.