• Tuesday, May 21, 2024
businessday logo

BusinessDay

Lower oil prices create fears of another naira devaluation

Oil prices

Brent crude plunged to a five-month low as increased production from Libya coincided with a wave of new coronavirus-induced lockdown across Europe, raising fears of another currency devaluation in oil-dependent Nigeria.

Brent dropped 3.5 percent on Monday to $36.70 a barrel in London, the lowest since May 2020, while US crude dropped by 3.6 percent to $35 a barrel. Both price indexes are now down 44 percent this year.

The last oil collapse triggered a first wave of devaluations as the Central Bank of Nigeria (CBN) in March 2020 devalued the naira from N306/$, where it had been for over two years, to N360/$ following the crash in oil receipts, and to N381 per dollar in April.

On Monday, global oil traders Vitol and Trafigura said they expect that a resurgence in coronavirus cases in Europe and the United States would hurt fuel demand, although their estimates vary.

Trafigura expects oil demand to fall to around 92 million bpd or below in the short term, while Vitol sees winter demand at 96 million bpd.

A second virus wave would see oil demand destruction at about 1 million barrels per day (bpd) in the United States and 1.5 million bpd in Europe, Trafigura’s Executive Chairman & CEO Jeremy Weir said at a Financial Times event in Singapore on Monday.

In Libya, the pace of the production recovery continues to surprise traders and create headaches for the OPEC+ alliance. Daily output has reached 800,000 barrels and the country is targeting 1.3 million by the beginning of 2021, said Mustafa Sanalla, chairman of state-run National Oil Corp. That compares with just 100,000 barrels a day in early September.

In addition, the bears will be motivated by the uncertainty of the outcomes of the United States election, which signals a delay in the stimulus bill (which has provided oil markets support for the past few months).

“Nigeria would need her allies in OPEC+ to push forward their meeting which was originally slated for the ending of November/start of December,” Charles Akinbobola, analyst at Sofidam Capital, said.

With oil prices at $39 and Nigeria’s crude oil output down to 1.4 million barrels per day, the Federal Government is inevitably staring down a revenue problem.

Nigeria faces a greater challenge than many other countries from the pandemic as a result of being the largest economy in Africa, with a population of 200 million.

“Specifically, we expect the performance in the oil sector to remain downbeat, due to lower oil prices and reduced production levels in compliance with OPEC+ cuts,” analysts at CSL Stockbrokers said.

Data compiled from the breakdown and highlights of 2020 budget performance presented by the Minister of Finance, Budget and National Planning, Zainab Ahmed, showed that in the first seven months of 2020, Nigeria recorded N2.5 trillion in revenue and spent about N6.25 trillion, creating a record budget deficit of N3.7 trillion.

Nigeria has also waited agonisingly for the $1.5 billion World Bank facility which it had hoped will help shore up its external reserves.

Already, poverty has more than doubled in the last five years, placing Nigeria ahead of India as the poverty capital of the world despite having less than a third of India’s population, according to a Brookings Institution report.