The continuous spread of Coronavirus which has roots in China could mean additional headaches for Nigeria’s economy managers as the decline in global oil demand and the consequent fall in prices may throw the country’s 2020 revenue projection in disarray.
The World Health Organisation has officially declared the Coronavirus a public health emergency of international concern and Nigeria and other Organisation of Petroleum Exporting Countries (OPEC) members could either rise in defence of oil prices or adjust to the realities of dwindling oil revenue.
At least 213 people are now dead from the disease, and more than 9,709 cases are confirmed worldwide. Coronavirus is the latest upheaval for the oil market, which has been struggling with demand concerns for months. China is a large consumer of crude oil.
China is the world’s largest importer of oil, with over 10 million bpd in 2019. A dramatic slowdown in air travel, closure of offices and manufacturing plants and stoppages on infrastructure projects mean a deepening impact on demand at a time of weakening overall global demand.
The bigger worry among traders is that the more the virus spreads, the more it would lead to a general and sustained decrease in economic activity in China and, potentially, in other parts of the world, a development which is worrisome for Nigeria because the international oil price has dragged to $58 as at Friday, January 31.
The 2020 budget, which was signed by President Muhammadu Buhari in December, was based on oil production of 2.18 million bpd with an oil price benchmark of $57 per barrel.
“Nigeria is economically exposed to the virus due to its oil-based economy. The Coronavirus is rattling markets and is arriving when the oil market was already awash in supplies and demand growth was modest,” Charles Akinbobola, a Lagos-based energy analyst, said.
Lower oil prices have often meant Nigeria, Africa’s biggest oil producer, struggling to earn more in foreign exchange and fund its budget deficit. This is because oil accounts for 90 percent of Nigeria’s foreign exchange and 85.6 percent of its total export.
The Federal Government is looking to generate N2.64 trillion in oil revenue, which is 32.34 percent of expected total revenue for this year, with non-oil revenue projection being N1.80 trillion.
Nigeria’s crude oil production fell to a record low of 1.57 million barrels per day in December 2019 from 1.66 million bpd in November, according to OPEC data.
Brent, against which Nigeria’s crude is priced, had risen above $70 per barrel earlier last month following the killing of an Iranian general, Qassem Soleimani, by the US on January 3.
The lockdown of a growing number of Chinese cities and cancelled flights threaten one of the steadiest growth areas of global oil demand, with jet fuel accounting for about 15 percent of demand growth in China, RBC Capital Markets said in a report.
The effect of Coronavirus on global crude oil demand is clearly a concern for OPEC.
Oil prices had already been weighed down by oversupply and slowing demand from China. Last week, analysts at Goldman Sachs Group said the Coronavirus could cause global oil demand to slip by 260,000 barrels a day, with jet fuel accounting for some two-thirds of that drop.
If the Coronavirus is as bad as the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, oil demand could fall by 700,000-800,000bpd, reflecting more than a half of the expected demand growth for 2020, according to S&P Global Platts Analytics, a provider of energy and commodities information and a source of benchmark price assessments in the physical commodity markets.
Barclays, British multinational investment bank and financial services company, headquartered in London, sees global crude oil demand loss related to the virus at around 600,000-800,000 bpd in Q1 and around 200,000 bpd for the full year, which they note is less than 0.2 percent of global demand.
They also see OPEC and allied producers stepping in with more supply cuts if demand loss is more severe.
But Saudi Energy Minister Prince Abdulaziz bin Salman said the impact seen on oil and other markets was “primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand”.
OPEC at first downplayed the impact of the virus, indicating that it wouldn’t do much to demand and price. But as the infection’s magnitude and spread become clearer, there are talks that OPEC and allied members might be responding with a call to extend the 1.7 (mbd) production cut past March.
According to oil market watchers, the possibility of a deeper cut is in the cards as something will need to hold the price floor steady.
An OPEC source told Reuters there were “preliminary discussions” among OPEC+ for an extension of the current oil supply cuts beyond March, and a possible deeper cut was also an option, if there was a need, and if the China virus spread impacted oil demand.