Three reasons why Nigeria should not expect an oil rally soon

Nigeria, like other oil-producing countries, is suffering from the double whammy of the coronavirus-related economic slowdown and the oil price crash and a rally may not be here soon for three reasons.

China’s changing oil strategy

In recent months, the world biggest importer, China has changed its oil policy by importing more crude oil from the United States while reducing purchase from Organisation of Petroleum Exporting Countries (OPEC), a development that would lead to more oil glut and lower oil price.

Saudi Arabia’s oil exports to China in July declined by 23.4 percent to 1.26 million barrels per day (bpd), making Saudi Arabia China’s third-largest oil supplier while Chinese imports of U.S. crude oil soared by 139 percent year over year, to around 864,200 bpd, placing America at the fifth place among Chinese suppliers.

To compare, in each of May and June, China imported 2.16 million bpd of Saudi crude, a record high. Saudi Arabia has lost market share in China not only to the U.S. but also to Brazil, estimates from Reuters columnist Clyde Russell show.

Growing inventories

There is real danger of a growing supply glut that could soon flip and inventories could start rising again – a very negative development for oil prices.

According to EIA data, U.S. oil inventories declined by 10.6 million barrels during the week ending July 24 and then dropped by 7.4 million barrels, 4.5 million barrels, and just 1.6 million barrels in the three subsequent weeks, respectively.

Norwegian independent energy research firm, Rystad Energy has also warned that a renewed surplus could come knocking again following the loosening of the OPEC+ production cuts:

“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand. The overall liquids market will flip back into a mini-supply glut and a swing into deficit will not happen again until December 2020.”

Analysts at Dutch bank ING expect the oil market to remain in a supply deficit for this year and throughout 2021 with Brent forecast to average $40 per barrel in the third quarter of 2020 and $50 in the fourth quarter.

Uncertainties of coronavirus

The coronavirus pandemic affects the oil market in two ways. First, travel restrictions due to containment efforts limit the use of jet fuel, and supply chains slow and industrial activity declines, less oil and oil-based products are being used and produced including the stock market.

Implication for Nigeria

The collapse in oil prices and oil demand, and the new OPEC+ production cut deal – with which Nigeria has yet to comply fully have crippled Nigeria’s government revenues, more so than in some other countries, because crude oil is Nigeria’s largest source of revenues.

In the second quarter of this year, Nigeria’s economy shrank by 6.1 percent year over year due to the low oil prices and the lockdowns in the country to curb the spread of the coronavirus.