Crude supply cuts and the prospect of a breakthrough in Sino-American trade talks rally prices to $58 a barrel

NIGERIA'S budgetary targets based on crude oil selling for $60 a barrel appear to be back on track after world prices rose by 1.5% today rising to $58.04 a barrel amid signs that China and the US are set to resolve their ongoing trade dispute.


Last month, President Muhammadu Buhari presented the 2019 budget to a joint session of the National Assembly. Worth a total of $28.8bn, the budget was based on Nigeria selling 2.3m barrels of oil at an average price of $60 a barrel, with about $9.5bn set aside to fund capital projects.


However, the budgetary proposals came under immediate threat after global oil prices fell to $48 a barrel at the end of December. Worried at the development, the Organisation of Petroleum Exporting Countries (Opec) announced plans to cut production and this bullish news, coupled with the resolution of the Sino-American trade dispute, have combined to rally prices.


Yesterday, Brent crude futures prices rose to $58.04 a barrel, while West Texas Intermediate (WTI) crude oil futures prices climbed to $48.85 a barrel. Nigeria's Bonny light crude is generally priced alongside Brent crude because they are similar types of oil that are low in sulphur content and if prices keep rising, they could hit the $60 benchmark soon.


With signs of a breakthrough in US/China trade talks, global futures have enjoyed a bounce as Washington and Beijing have been locked in an escalating trade spat since early 2018, raising import tariffs on each other’s goods. This dispute has weighed on economic growth but a resolution in sight, average crude oil prices are expected to be around $62 a barrel this year.


Goldman Sachs said that it had downgraded its average Brent crude oil forecast for 2019 to $62.50 a barrel from $70 due to the strongest macro headwinds since 2015. French bank Societe Generale also lowered its oil price forecasts, cutting its 2019 average price expectation for Brent by $9 to $64 a barrel and reduced its WTI forecast to $57 a barrel.


According to Societe Generale, it had revised its global oil demand growth forecast to 1.27m barrels per day, down from 1.43m barrels previously. In the latest signs of widespread economic slowdown that could also hit fuel demand, British new car sales in 2018 fell at their fastest rate since the global financial crisis a decade ago.


Also, German industrial orders dropped in November as exporters suffer from the trade dispute between China and the US. Despite the likelihood of a slowdown, crude future prices were being supported by supply cuts started late last year by Opec and Russia.


Goldman Sachs said the cuts would result in a gradual increase in spot crude prices in 2019 as high inventories revert to their five-year averages. Opec oil supply fell in December by 460,000 barrels per day, to 32.68m barrels, led by cuts from top exporter Saudi Arabia.


Because of record US crude oil production of 11.7m barrels a day, American fuel stockpiles are rising, according to weekly data by the Energy Information Administration. Crude oil inventories rose by 7,000 barrels in the week that ended on December 28, to 441.42m barrels, more than 5m barrels above their five-year average.