Is there light at the end of the tunnel for African petrostates?

By Richard Li

The year 2020 has been turbulent for the global oil industry. The sudden impact of the coronavirus pandemic on oil demand was so severe that the futures price of West Texas Intermediate (WTI) on the New York Mercantile Exchange (NYMEX) went negative, reaching -$37.63 on 20 April. As for Brent crude, it reached a low of $19.33 on 21 April, a 72% drop from its peak this year. Oil is a major commodity export for Africa and many African petrostates are highly dependent on their oil revenues.

The coronavirus is still spreading unabatedly throughout the world, including Africa. Many countries are now experiencing their second and third waves of the viral infection. While some countries in Asia and Europe are trying hard to control the spread, others like the US are mainly depending on potential vaccines to fight the virus. Between country lockdowns and economic crisis, the world economy went into recession and oil demand went into a downward spiral. This has also pushed many African petrostates to the edge, inflicting major damage to their economies. While oil prices recovered slightly, they are still not back to pre-Covid-19 levels.

Low oil prices despite production cuts

At least half of all African countries are involved in oil exploration and production. Not only the top three oil-exporting countries – Nigeria, Angola and Algeria – are petrostates, but smaller countries like Equatorial Guinea and Gabon also fall into this category, since they are highly dependent on their oil exports. Seven out of the 13 members of the Organisation of the Petroleum Exporting Countries (OPEC) are from Africa. Together with 10 other oil-producing countries led by Russia, the OPEC+ group has been managing their collective production over the past years, so as to maintain relatively high oil prices to support their respective economies.

However, the coronavirus pandemic has become a black swan event that upended all the OPEC forecasts. In the first quarter, despite OPEC+ and other countries reducing their oil output by 5.4 million barrels per day (mb/d), there was still a massive oversupply due to the global demand slump. From the OPEC November report, global oil production reached 94.5 mb/d in 2019. For 2020, it foresees that production in non-OPEC countries will decline by an overall 2.43%, while in October, production from OPEC members dropped by 4.95 mb/d, a nearly 17% decline. African members contributed about 28.5% of the cut in production. Hence, oil revenues for these African countries will be significantly less in 2020.

To make matters worse, oil prices are not recovering fast enough to pre-Covid-19 levels. In 2019, average prices for African crudes – Algeria’s Sahara Blend, Angola’s Dalia & Girassol, Congo’s Djeno, Equatorial Guinea’s Zafiro, Gabon’s Rabi Light, Libya’s Es Sider and Nigeria’s Bonny Light – were all above $60. Yet, with the coronavirus pandemic, Bonny Light, Dalia, Girassol and Sahara Blend reached April lows of $14.85, $12.83, $15.31 and $11.28 respectively. While prices have recovered slightly, as of 14 December, prices of these crudes are still down by nearly 30% from their peak in January. The double impact of production cuts and low prices are therefore threatening the economies of all these African petrostates.

Demand shock with the coronavirus crisis

In 2019, the average global oil demand reached 99.76 mb/d. While OPEC forecasted that demand would increase slightly in 2020, the coronavirus outbreak changed all its calculations. In the first quarter, global oil demand dropped by a massive 7.1 mb/d. With China locking down the Hubei province and stopping the movement of people within the country, its oil demand plummeted by a massive 19.5%. This was then followed by another collapse in demand to an overall drop of 17.2 mb/d in the second quarter, with Europe, some American states and other countries, also undergoing lockdown. Oil demand among OECD countries contracted by 21.3%. The African oil demand also reduced by 15.3%.

The slash in demand was so swift that the production cuts from OPEC members were not enough to avoid an oil glut and prevent prices from spiralling down. Overall, OPEC estimates that oil demand will dwindle by 9.78% in 2020. Going forward in 2021, the OPEC forecast is not looking great. While it is forecasting that demand will increase by 6.94%, the overall global demand will still not attain the 2019 level. In fact, only the Asian region is predicted to exceed its 2019 demand level. Having been able to control the coronavirus spread, China is the main country where oil demand will increase to 13.81 mb/d. With America and Europe still battling their second and third waves of the viral infection, their demand forecast will still be less than that in 2019. It is a similar situation for the African continent.

In addition, the 2021 oil demand will depend on many other exogenous factors like the ability and success of countries in stemming the spread of the disease, the availability of vaccines and the speed of immunisation, business and consumer confidence to boost the economic recovery and many others. Hence, the OPEC+ group still has to maintain or even increase their production cuts to manage the global oil demand and supply in 2021. Unfortunately, in the short term, there will be more pain for the African petrostates. The slump in demand as well as the low oil prices will not be conducive for a major rebound of their respective economies.

Severe and prolonged pain

In its latest World Economic Outlook, the International Monetary Fund (IMF) estimates that the global economy will contract by 4.4% in 2020. By and large, the advanced economies will shrink by 5.8%. Growth in countries like America, Canada, France, Germany, Italy, Japan and the United Kingdom will decline significantly by 4.3%, 7.1%, 9.8%, 6%, 10.6%, 5.3% and 9.8% respectively. Among the major economies, only China is forecast to have a positive growth of 1.9% this year. As for the sub-Saharan Africa region, it is estimated to contract by 3%, with South Africa declining by a massive 8%.

While the 2020 outlook looks bleak, the IMF is projecting a positive rebound of 5.2% in global growth next year. However, for sub-Saharan Africa, growth will be lagging global growth at 3.1%. As for the main African petrostates, Algeria, Angola and Nigeria are estimated to contract in 2020 by 5.5%, 4% and 4.3% respectively. For 2021, they are also projected to lag behind global growth with marginal growth rates of 3.2%, 1.7% and 2% respectively. While the IMF projections are assuming that vaccines and effective treatments against the coronavirus will be available next year, there are still many unknown factors that can affect the global economy. Hence, in the short and medium term, the oil industry in Africa and globally will be subjected to the many vicissitudes of the coronavirus pandemic.

Currently, the global oil industry is affected on both demand and supply sides. With abundant supply and demand not recovering to pre-Covid-19 levels, the OPEC+ group and the African petrostates will have very hard decisions to make. As a result, the immediate future of the African petrostates is not looking great with more severe and prolonged pain.

Richard Li is a Partner with STEEL Advisory Partners, a management consulting firm that serves clients across industries. Having spent his working career in strategy consulting, he worked with various global clients and covers themes such as corporate strategy, transformation, digital innovation and risk management. He is an avid observer of world affairs and emerging markets, particularly the African continent.