Brent oil price passed US$100/bbl for the first time since 2014 as a worsening of the Russian-Ukraine crisis continues to spark fears of a disruption to the region’s energy exports. Russia is a key supplier of energy to global customers, with Europe relying on the nation for about a quarter of its oil supplies. The oil market has been relatively strained as oil supplies around the world continue to lag the strong recovery in demand from the pandemic. The OPEC+ coalition is also struggling to restore production quickly enough. Beyond higher oil prices, the Russian-Ukraine crisis will likely result in an increase in prices of other commodities, such as wheat, CPO and fertilisers.
Theoretically, the continued uptrend in crude oil prices, a major source of foreign exchange to the country, suggests FX accretion. However, the perennial issue of terminal shutdowns, vandalism and thefts continue to fuel sub-optimal oil output despite the relaxation of OPEC+ production agreements. Average daily oil production for the fourth quarter of 2021 was 1.50mbpd, lower than the third quarter 2021 production volume of 1.57mbpd and news reports point to still lower production in January. Meanwhile, OPEC raised Nigeria’s production to 1.66mbpd in December 2021. The uninspiring output has been largely due to crude oil terminal maintenance, shutdown, and reduced investments. The real growth of the oil sector was -8.30% y/y in 2021 compared with -8.89%, while the sector contributed 7.24% to real GDP in 2021.
We project crude oil production (including condensates) to reach 1.75mb/d in 2022. While this is an improvement from 2021 levels, it still lags the 5-year average of 1.85mb/d. We expect the continued elevated crude oil price, coupled with the passage of the PIB, to incentivize drilling activities. Beyond this, we expect the commencement of 160,000 Amukpe-Escravos export terminals in H2 2022 to support crude oil production. This makes us forecast the oil sector may return to growth in H2 2022. However, we project the FX reserves to deplete to US$35.00 billion by the end of 2022, translating to goods and services import cover of 5.4x. Though there are speculations that the government may return to the Eurobond market in the year, we believe the external financing conditions are not favourable due to the gradual global interest rate normalisation and lower liquidity.