Nigeria’s failure to prepare for the rainy day of sharp decline in oil prices has come to haunt it, despite historical evidence that points to the boom and bust nature of oil markets.
Oil markets are susceptible to both macro-economic indicators such as aggregate demand and geopolitical factors. To redress this, oil producing countries save during periods of boom to create buffers for periods of busts. But Nigeria has failed to save for rainy days from excess crude sales and behold a rainy day has come and Africa’s biggest oil producer is out in the rain.
Brent Crude, the international benchmark for oil price was $35.24 per barrel at 11:21 GMT on Monday, having lost $10.03, and fallen by over 22.16 percent, live updates from oilprice.com show. Falling oil prices means big ticket projects in Nigeria’s oil and gas sector are likely to stall, rig counts will fall, oil servicing companies and suppliers will take some hit and oil and gas companies may start defaulting on loans from commercial lenders.
“If this goes beyond two months the Central Bank of Nigeria will be unable to defend the naira anymore and currency devaluation will necessarily set in. We saw this in 1979, 1985 and 2014 – 2015,” Gbite Adeniji, a former technical adviser Upstream and Gas to the Ibe Kachikwu, former minister of state for Petroleum Resources told BusinessDay on phone.
The bottom has dropped off the oil market. It is a good opportunity for Nigeria to exit its subsidy regime and every Nigeria must tighten their belt now, Adeniji suggested.
Unlike the 2016 lows, which were largely driven by oversupply, the current oil price free-fall is a demand-led crisis. The global economy is facing real questions about a recession, and the coronavirus continues to spread.
Paris-based International Energy Agency said on Monday that the “visible decline in transport, industrial and commercial activity” points to a drop in global oil demand of 2.5 million barrels a day for the first quarter, compared to the same quarter last year. Of that, China would account for 1.8 million barrels a day.
“It is the most severe decline since Q4 2008, the height of the 2008-2009 global economic crisis, which saw demand tumble by 2.8 million barrel per day,” Ann-Louise Hittle, vice president, Macro Oils, at Mackenzie, said in a statement.
The consultancy sees demand contracting by over 2.7 million barrels per day. If the impact of coronavirus has had on global oil demand is sustained.
The failed Friday OPEC+ meeting was not just about making a further output cut. It was also meant to ratify an extension of the now collapsed agreement between the 20 nations to remove as much as 2.1 million barrels a day of oil from the market. That deal, reached in December, expires at the end of this month, leaving members free to pump as much as they wish from April 1.
Already, the Russian ruble tumbled to a four-year low Monday amid a crash in oil prices as authorities assured the public the country has enough foreign currencies to withstand the blow. The ruble fell 9 percent to trade at 75 to the U.S. dollar, a rate last seen in early 2016.
But Nigeria’s excess crude account (ECA) as of last month had depleted from $325 million to $70 million within one month due the country’s revenue challenges and lack of rules governing deposits and withdrawals from the special account.
The account was designed by during President Olusegun Obasanjo administration’s to house crude oil sales in excess of the budget benchmark, which is $57 per barrel in for 2020 fiscal year. This means oil prices above this benchmark is to be deposited in the ECA.
Some oil analysts are anticipating barrel prices as low as $20 within the year. Some experts have also suggested that Russia’s move is intended to counter US shale producers and a hit back against the U.S. for targeting the Nord Stream 2 gas pipeline connecting Russia and Germany.
