OPEC & allies agree to ease oil production cuts, here’s how this impacts emerging markets

The oil producer club OPEC and its allies, known as OPEC+, have agreed to ease production cuts to 7.7 million barrels per day from August until December this year. Dayo Amzat, the Managing Director and CEO of Zedcrest Capital, recently joined CNBC Africa to discuss the repercussions of this decision on the global oil market and emerging economies like Nigeria. Amzat pointed out that the initial decision to cut production by as much as 9.7 million barrels per day was made in response to the sharp drop in demand caused by the COVID-19 pandemic. As demand gradually recovers, production volumes are expected to normalize. The increase to 7.7 million barrels per day from July implies an additional 2 million barrels per day of supply entering the market. Amzat believes that the uptick in demand will outpace this incremental supply, resulting in minimal impact on price levels. While concerns arise about a potential impact on oil demand due to a second wave of lockdowns in various countries, Amzat remains optimistic. He highlighted the strong demand recovery in major economies like China and the United States, which are aiding in supporting oil demand. Unless there is a significant resurgence in COVID-19 cases, Amzat does not anticipate a return to widespread lockdowns that were previously imposed. The International Energy Agency forecasts a gradual rebalancing of global oil markets, with oil prices expected to surpass $40 in the coming months. Amzat's views align with this projection, anticipating a gradual price increase towards $50 in 2021. Factors such as supply shocks from production cuts and the lag in oil market investments are expected to constrain new supply, supporting price levels. When considering the role of geopolitics in oil market dynamics and strategies for African oil producers, Amzat emphasized the challenges ahead. African oil producers may struggle to recover fully, with oil prices likely to remain in the low $40 range this year. Many African countries have adjusted their budget expectations and tapped into credit lines to manage the financial gap in 2020. However, the full impact of the crisis is expected to materialize in 2021, especially in the absence of a proven cure or vaccine. Amzat highlighted the importance of fiscal planning for African countries in the aftermath of the COVID-19 crisis. While some nations like Nigeria have taken measures to secure funding, others facing severe economic distress, such as Zambia, may continue to grapple with budget deficits. Looking ahead to 2021, Amzat emphasized the need for African countries to address revenue shortfalls compared to budget expectations and formulate sustainable strategies to navigate the post-pandemic economic landscape. In conclusion, Amzat's insights shed light on the complexities facing oil markets and emerging economies in the wake of production cut adjustments by OPEC and its allies. As global conditions evolve, the resilience and adaptability of countries like Nigeria and other African oil producers will be crucial in mitigating the long-term effects of the ongoing crisis.