Panic is beginning to spread through the oil market as the price of Brent, the benchmark for Nigeria’s crude oil fell below $16 a barrel for the first time since 1999 on Wednesday as markets continue to struggle with oversupply caused by the coronavirus lockdown.
Brent crude oil dropped to a two-decade low on Wednesday Morning, trading as low as $15.98 a barrel before increasing to $21.30 by 4 pm Nigerian time as the global oil rout continued.
The weak trading followed a 24percent drop on Tuesday for Brent amid increasingly negative sentiment surrounding West Texas Intermediate crude futures turning negative for the first time.
The drop, sparked by a perfect storm of coronavirus fuelled demand destruction and global crude storage facilities reaching their limits, is unlike anything markets have ever seen. And it’s left even the most veteran industry players scratching their heads.
Naeem Aslam, the chief markets analyst at AvaTrade said in a note on Wednesday that Brent prices were unlikely to turn negative as WTI crude oil contracts for May did earlier this week, but could hit zero if storage concerns persisted.
“If global storage is running out- and that is what the Brent trade is starting to suggest then there will be no bid and prices could hit zero,” Aslam said .
Aslam said he expected Organisation Petroleum Exporting Countries (OPEC) to hold another emergency meeting within a week, given Saudi Arabia’s dependence on oil.
“The sell-off that has been trigged in the Brent prices today is highly likely to put more pressure on OPEC+ to cut the oil production more,” he said.
The dangerous exposure of Nigeria to the crude oil price crash and low demand globally will be a huge blow to the country’s ability to meet its revenue target for the revised budget, lead to more pressure and instability in the country’s foreign exchange market, have a negative effect to different upstream projects in the country.
This development will not only threaten the financial stability of the 36 states heavily reliant on federal allocations to pay their bills, but also significantly hamper the implementation of the federal budget, putting an already battered economy in worse shape.
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.
Severe restrictions on travel and the broader economy have caused demand for fuel and energy to fall at its fastest rate in 25 years.
A lack of storage options, particularly at a key storage facility in Oklahoma, amid the reduction in demand for the commodity has put pressure on oil prices and this week helped push WTI, the US benchmark, into negative territory for the first time.
Prices went negative on WTI as the futures contract for May expired, meaning anyone holding a contract was obliged to take delivery of the oil. With storage limited, traders resorted to paying others to take the contracts off their hands.
Bjørnar Tonhaugen, the head of oil markets at Rystad Energy, told CNBC, the world’s onshore oil storage would be filled to the brim by the first week of May and the market should brace for unprecedented low prices in the weeks ahead.
In previous weeks oil traders have held hope that prices could be kept afloat by a deal to rein in oil production, but Tonhaugen said rising storage levels had given rise to panic.
“Traders have exhausted their ‘hope storage’ and have nothing else to count on,” he said. “Prices can go to unprecedented low levels even for Brent as, unless there are further cuts announced, storage capacity will just not be enough.”
He said unless there was “a massive shock” such as oil well shutdowns equivalent to cutting millions of barrels from global production or an earlier-than-expected lifting of lockdown measures, oil may soon be “cheaper than a latte”.
DIPO OLADEHINDE
