Nigeria’s finances wither as oil prices hit crisis-era lows

Oil threatened to break below the lows hit during the financial crisis six years ago, amid heightened concern in Abuja over what this holds for the administration of President Muhammadu Buhari who came in seeking to push an expansionary budget which will see Nigeria spend her way out of an unprecedented economic downturn.

International oil prices have been falling because of increased expectations of a persistent oversupply in global crude, even before Iran opens the floodgate in a matter of months the Financial Times reports.

Nigeria’s oil earnings are disappearing daily and the country is finding it increasingly more difficult finding buyers for her premium grade crude, as many buyers turn vessels into storage facilities on seas across the world.

“Oil prices were down to an average of $54pb in Q1 2015 compared to $74pb in Q4’14, leading to FAAC average of N485bn compared to N600bn,” Bismarck Rewane, CEO of consulting firm, Financial Derivatives Company said in a recent presentation.

“Drop in federal revenues increases the necessity for private sector led investment in large-scale infrastructure.”

The proposed 2016 expansionist budget of N6trn is 33 percent larger than the N4.5trn approved for 2015 and has an embedded deficit of N2.2trn.

The budget has a benchmark price of $38pb, 28.3% lower than 2015.

Brent crude dropped $1.60 to $36.33 a barrel — the lowest in seven years — edging closer to the December 2008 intraday low of $36.20 a barrel. If Brent falls below this, it will hit a level last seen in the middle of 2004.

“Low oil prices will undermine fiscal revenues and government investment and with adverse consequences for growth,” Doyin Salami, a Lagos based economist said.

The global benchmark, which declined for its seventh consecutive session, rebounded in afternoon trading to $37.35 a barrel.

“The year is ending on an uncomfortable note. The smell of fear is back in the air,” said David Hufton, at London-based broker PVM.

The US market benchmark, West Texas Intermediate, sank $1.09 to $34.53 a barrel — the lowest since February 2009 — before recovering to $35.62 a barrel. WTI traded at $32.40 a barrel in 2008.

Oil prices have tumbled since the meeting of Opec ministers at the start of the month. Brent has plunged as much as 17 per cent, while WTI is down 16 per cent.

Discord within the group on which members should make production cuts to shore up the price led to the continuation of Opec’s existing policy to keep on pumping. In addition, the group scrapped its official production ceiling and took away any pretence of output constraint.

“The Opec meeting has removed any last hopes of a reprieve for oil and it has added another layer of downside sentiment to commodities in general. The dam has collapsed and prices are in free fall, with devastating consequences,” said Hufton.

Despite weakening production growth outside Opec, members of the producers’ group have ramped up output in the face of lower oil prices.

Tom Griffin, Senior Managing Director, Control Risks West Africa,said in a report released yesterday (Dec 14): President Muhammadu Buhari’s government and policy directions will continue to take shape after his election victory in March 2015. He and his cabinet, recognising the urgency of enacting reforms that will help Nigeria cope with lower revenue from oil sales; will prioritise work on reshaping the national oil company and taking more control over how it uses its income.

His administration, seeking to avoid recession by passing an expansionary budget, is expected to target large-scale spending on building essential public infrastructure and focus on diversifying the economy beyond oil and gas. Reforms will however be slowed and made more difficult by a troubling fiscal situation.

Iraq and Saudi Arabia have pumped at record levels this year, while oil market participants are eyeing the appearance of additional barrels from Iran when sanctions linked to its nuclear programme are expected to be lifted next year.

“It seems the Iranians are fulfilling the requirements for the lifting of sanctions faster than expected,” said one London-based oil trader. “In addition, the Libyans are talking to one another about a ceasefire. If Libyan production can go back up, the price effect is almost unthinkable.”

The International Energy Agency, the world’s leading energy forecaster, said oil stockpiles are expected to swell throughout next year, albeit at a slower pace than in 2015.

“Gloom is nourishing gloom on the oil market,” said Carsten Fritsch at Commerzbank. The sell-off has taken on “ludicrous dimensions”, he added.

A stronger dollar and money managers re-establishing their short positions were piling on the pressure, said Adam Longson, oil analyst at Morgan Stanley. “The outlook for prices appears grim,” he said.

The weakness in crude has spread to some oil products. Refineries that have been working hard to meet demand for gasoline have also produced more diesel than is needed.

ODINAKA ANUDU