Cash-strapped FG to struggle as oil supply outstrip demand early next year

The International Energy Agency(IEA) said in its latest monthly oil market report that despite deeper supply curbs by Organisation of Petroleum Exporting countries (OPEC) and its allies including Russia, global oil inventories may accumulate by 700,000 bpd in the first quarter of 2020.

OPEC and its partners led by Russia agreed last week to cut their combined production by another half a million barrels daily. OPEC members will shoulder the bulk, at 395,000 bpd, while Russia and the rest of the non-members will take on an additional 105,000 bpd in cuts.

The cartel said it will meet to finalise any proposed measures, including how any cuts will be implemented by countries. To cushion the impact on members, the group said that condensates will no longer be quoted as part of output for countries.

Saudi Arabia, in the meantime, agreed to continue to over comply with its quota, cutting 400,000 bpd more than agreed in December 2018. The agreement, however, did not have the full desired effect of pushing prices higher and keeping them there, not least because of a history of cheating among OPEC members on their oil production quotas.

But the EIA says it will not be enough. “Despite the additional curbs and a reduction in our forecast of 2020 non-OPEC supply growth to 2.1million bpd, global oil inventories could build by 0.7million bpd in 1Q20,” said the Paris-based energy think tank.

It reached this conclusion based on rising supply outside the group led by shale producers in the United States which continues to grow much faster than demand. Three months ago, the United States became the net exporter of crude oil and it is not slowing down.

On the demand side, the IEA also revised down its earlier estimate, which saw global growth of 1.1 million bpd in the third quarter of the year. Now, the IEA has revised this down, too, to 900,000 bpd. The agency noted, however, that this growth rate was the strongest year-on-year increase in 12 months. The demand growth outlook for full-2019 and 2020 remained unchanged, at 1 million bpd and 1.2 million bpd, respectively.

Nigeria has a lot riding on oil next year. According to its 2020 budget assumptions, it expects an oil production of 2.18 million bpd compared to 2.3million bpd this year.

Nigeria may raise condensate production, but its crude output has been capped and may not be allowed to supply more 1.7mllion bpd. Already the minister of state has said the government would abide by the supply cap agreement.

The 2020 budget anticipates a crude oil price of $57 a barrel hence a supply glut will push the target farther away. the aggregate revenue available to fund the 2020 is projected at N8.155 trillion and 43.86 percent of projected revenues is to come from oil sources while the balance is to be earned from non-oil sources.

A glut in crude oil supply will ruin these assumptions. This was the case in 2016 when oil prices crashed to less than $40 barrel in the first quarter of 2016.  This eventually forced Nigeria into a recession in 2017. A cash-strapped Federal Government who is going to operate a chunk of the 2020 budget on debt, will hope to shore up revenue through crude oil sales.

Despite all pretence at diversification, Nigeria is yet to wean itself from overdependence on crude oil. This situation raises the need for a holistic approach to deepen current efforts to diversify the economy. Petrol subsidies will further add a burden. This is why the government is aggressively seeking to raise taxes on citizens as seen in the passage of the Finance Bill but it will require greater transparency and accountability to achieve the support of people.