Analysts advise diversification, prudence as oil price slumps

Brent crude settled at sub-$50 per barrel yesterday – the lowest level since 2009, as analysts and portfolio managers forecast that it may ebb at $40/pbl, leading to short position options that are further threatening the stability of the economy.

However, some analysts said last night that increased propensity to spending by government and the likely supply surplus and weak global demand, occasioned by the resumed sell-off for oil prices on both sides of the Atlantic, among others, are making Nigeria’s position precarious, stressing however that the development is not new to the country.

Already technical analysis point to a possible drop to $40 a barrel if prices drop below $60 a barrel. According to some analysts, the development, which they say is inevitable might compel government to alter the budget benchmark currently at $65.

Ayodeji Ebo, Head, Investment Research, Afrinvest Securities limited said that the oil price at US$40.00/pbl will result in a significant 38.5% deviation from the 2015 budget crude oil benchmark (US$65.00/pbl), implying a fiscal revenue shortfall in 2015.

“In our view, Nigerian equities and certain macroeconomic variables (the general price level and exchange rate) will be directly impacted. However, more significant, budget performance at the federal and state level will weaken which could negatively impact standard of living in the country,” Ebo said.

To avert the impending fiscal crises, he said that the fiscal managers need to take the bull by the horn, adopt a two prong approach of generating more non-oil revenue, whilst also cutting government expenditures. This would involve blocking revenue leakages and unlocking more non-oil revenue lines (though this may require time to achieve beyond the current fiscal year).Hence, a policy geared towards a more optimal recurrent-capital expenditure mix should occupy the center stage.

“Whilst we note that carrying out such deep structural reforms in a fiscal crisis may be unpopular, especially during an electioneering period, there is a compelling call for the fiscal authority to complement efforts made by its monetary policy counterpart,” Ebo said.

Continuing, the analyst said, “oil price at below $40/pbl will most likely result into further official devaluation of the naira, plus increased pressure on forex demand-supply dynamics, as investors are more likely to sell down on their portfolios in scramble for safe haven. Equities and fixed income markets will also suffer more losses, as foreign investors (who control 59% of equity market as at Nov-14) exit and credit rating (which determines fixed income market patronage) drops.”

Commenting on the development, a former general manager, Nigeria National Petroleum Corporation, (NNPC), who pleaded for anonymity, however  said that Nigerians should not panic over the drastic reduction, adding that even if the price falls below $40 per barrel,  there is no cause for alarm, as this is not the first time  Nigeria is experiencing such a  drastic crash in the  price of crude oil.

H e said, “this situation was  worse  than this in 2008 /2009 when the  price of crude  rose  to $147  in July 2008 and  then suddenly  crashed  to about $40  per barrel  in January 2009. Then, there was a drop of about $107 within a period of seven months.”

In the case  of the current situation, he said the price has just dropped  from  $115 to $54  per barrel  between July last year  and  January 5th 20015 with  a difference of about $61, and  that  there is no need  for the country  to be panicky, but rather  the politicians should  learn how  to save  for  a  raining day  by not spending  any money  they  get   in one fell swoop.

A similar situation, he said, happened in 1986 when the price of crude  dropped  from  $20 to $10 per  barrel , adding that the only  difference  between those times that   the country  had experienced  drops  in the   price  of  crude in this magnitude, was  that  at those  times,  there  was high foreign exchange reserve and excess  crude oil account  (ECA) that acted as buffers.

But unlike now, when there is nothing left in the   ECA and the foreign exchange reserve dropping at an alarming rate.

He described Nigerian politicians as very greedy people who have mismanaged state revenue, “afterall thy were  clamouring  for the money to be shared  and now that oil money has been shared, they  should go and look for money to pay salaries”.

According to Friday Ameh, an energy analyst, prices of crude are susceptible to changes. Ameh added that the difference now is the elections, with the attendant spending, which he said could lead the prices to be further depressed and for a longer period ,probably up to the half of the year.

He also attributed it to hedging strategies that provide quasi-insurance to shale producers, a favourable US federal tax code that protect shale producers even at low price levels and the slowdown in global demand.

“Oil prices still have further to fall before rebounding to sub $80 levels, as OPEC is unlikely to change its stance on its production quota of 30mbpd. The International Energy Agency (IEA) has revised downwards its oil demand growth forecast for 2015 to 93.3mbpd,230,000bpd lower than its initial forecast; indicating that lower oil prices may not solely be a supply glut problem but also signal slower demand and a deceleration in global economic growth,” says Bismark Rewane, chief executive officer, Financial Derivatives, in the current FDC Economic Monthly Bulletin.

The formost economist further said that “We expect to see economic growth and development slowing over the next year as the much needed revenue support is weakened. Though the devaluation of the currency will bring some respite to the naira and reduce external reserves depletion in the short term, the pressure on the currency might resurface if the decline in oil prices is sustained for a long period. To help mitigate the impact of lower commodity prices on export revenues, the government must seriously take the call to reduce revenue leakages in the economy and at the same time boost production of non-oil export commodities.”

Already Saudi Arabia has made a deep cut to its monthly oil prices for European buyers, while trimming prices for U.S refiners and increasing rates for Asia, fuelling the bearish sentiment.

State-owned oil company, Saudi Aramco said on Monday that it would cut February export prices for all oil grades to Northwest Europe. At the same time, it increased prices for Asian customers — its major selling market — after steep cuts in previous months.

Price cuts by Saudi Arabia have been interpreted by some market participants as a sign that the Kingdom will no longer take action to boost prices in a fight over market share, while others say the price differentials are more a reflection of general market weakness.

Nigeria has changed its benchmark price twice in the last few weeks, from $78 a barrel to $73 a barrel and lately to $65 a barrel – a level that is now above the market price of crude.

Brent crude has fallen nearly 47 percent since June, when it climbed near $116, while WTI futures are down almost 46 percent from the recent peak of $107.50 in June.

John Omachonu & Olusola Bello