The Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members including Russia failed to agree on export curbs to shore up prices on Thursday, and are now scrambling to push volumes into the market, setting off a price war that could impact Nigeria struggling to sell its crude.
Saudi Arabia on Saturday slashed official pricing for its crude scheduled for April which would be sold in Asia by $4-$6 a barrel and to the US by $7, according to a copy of the announcements seen by Bloomberg. Other producers are expected to follow.
Oil prices plunged by more than 8 percent after the OPEC+ meeting broke up with no deal. Saudi Arabia and Russia negotiated behind closed doors in Vienna, but Moscow refused to sign on to deeper production cuts. Brent crude is selling at $45 a barrel.
Analysts say Russia is counting on lower prices slowing US shale output as it had said the current oil price levels will not hurt its economy. Without OPEC+’s help to steady the market, U.S. benchmark prices could fall toward $30 a barrel as COVID-19 leads to a decline in demand for oil.
But shale producers are already hedged reducing the risk of adverse price movements. Hence producers like Nigeria, Iran, and Angola heavily dependent on higher crude oil prices to run their economies, may feel the biggest shocks from a $30 per barrel oil. Similar price levels, coupled with militancy in the Niger Delta sent the Nigerian economy into a recession at the end of 2016.
Saudi Aramco’s pricing decision affects about 14million barrels a day of oil exports but it will serve as a reference for other producers in the Persian Gulf who will take a cue from the world’s second-biggest producer to also slash prices.
This poses a danger to the market because Saudi Aramco has said it can produce as much as 12.5 million barrels per day. Last month it pumped 9.7million bpd but with agreements on curbs expiring this month and without any commitment to restrain production, it could well ramp production to maximum capacity to plug holes in its budgets.
Nigeria will face a different kind of problem; its budget gaps could widen. Oil traders are struggling to sell crude grades from Nigeria and Angola as the coronavirus leads to a sharp decline in demand from China and European refiners.
About 70 percent of April loading cargoes from Angola and Nigeria have yet to find buyers according to Bloomberg report. This is unusual because at this time, about half the volumes brought to the market would have been sold. These unsold volumes would be competing against millions of barrels that were slated for export in March and yet to be purchased.
To complicate matters further, without the curbs, more volumes would enter the market and the ensuing pricing war would shortage West African producers who have to move their crude over long distances to markets in Asia and Europe.
Curbs on Nigerian exports would have negatively impacted the Nigerian economy but a price war situation may worsen the scenario as lower prices coupled with difficulty in finding buyers would crimp foreign exchange earnings and put more pressure on the naira.
Lower oil revenue will lead to fall in Federal Allocations for the three tiers of government. In addition, Nigeria’s foreign exchange reserves could drop further, intensifying its fiscal crisis and adding pressure on the Naira, analysts say.
It could lead to businesses struggling and the capital market could be hit further with the border closure compounding the woes of companies in the country.
OPEC on Thursday had proposed an additional output cut of 1.5 million barrels to the end of the year, under which OPEC members cutting 1 million barrels a day and Russia and other allied non-members responsible for a reduction of 500,000 barrels a day.
The talks ended without an agreement. Russian Energy Minister Alexander Novak said there is no more oil output deal between Russia, its allies and members of OPEC, according to a report from Reuters. He said that from April 1 and onward, Russia “nor any OPEC or non-OPEC country is required to make output cuts,” the report said
IHS Markit expects first-quarter world oil demand to mark its largest quarterly volume decline in recorded history. It estimates world oil demand at 96 million barrels a day for the quarter, down 3.8 million barrels a day from a year earlier.
“Even if the alliance had agreed to the full 1.5 million bpd cut, that would only have addressed a portion of the demand destruction as a result of the coronavirus,” said Marshall Steeves, energy markets analyst at IHS Markit.
“That could exceed 4 million bpd between the loss of Chinese demand, global jet travel, lower gasoline demand as a result of people working at home and decreased economic activity overall.”
ISAAC ANYAOGU
