The Organisation of Petroleum Exporting Countries (OPEC) rising from a meeting on Thursday, which included non-OPEC members including Russia, proposed to cut global oil supplies by 1.5 million barrels per day (bpd) in an attempt to prop up prices as it confronts the biggest collapse in demand, no thanks to the impact of coronavirus outbreak.
The group proposed that the cuts, which would run through June 30, be shared with non-OPEC allies. Under the arrangement, OPEC would make one million barrels of trims, while Russia and other allies would cut 500,000 barrels.
The new restrictions on supply, if ratified by Russia and other allies, would be a further blow to Nigeria’s struggling economy, analysts say. It could see Nigeria’s exports fall to around 1.5m bpd which will affect dollar earnings and put pressure on the exchange rate.
Following previous OPEC cuts, Nigeria’s production was capped at 1.753 million bpd whereas the country exported 1.776m bpd in January, which was higher than OPEC’s cap on the country by 23,000 barrels.
“Oil prices are currently not at favourable region. Including Nigeria in this new production cut will cause more headache for Nigeria’s economic managers,” Emmanuel Akinbode, financial analyst at Sofidam Capital, said.
One major fallout will be FAAC monthly allocation for the three tiers of government expected to head downwards to a range of N600bn-N620bn. In addition, Nigeria’s foreign exchange reserves could drop to $34bn, intensifying its fiscal crisis and adding pressure on the naira, according to economists at Financial Derivatives Company Limited.
Businesses will struggle and the capital markets will be hit further with the border closure compounding the woes of companies in the country.
So far, though, Russia, OPEC’s most crucial ally, has remained cagey about its willingness to sign on to that strategy.
“If the Saudis can’t bring Russia on board, expect the depredations to continue,” Jim Krane, an energy analyst at Rice University’s Baker Institute, tweeted immediately after the meeting.
Alexander Novak, Russia’s energy minister, left Vienna on Wednesday without backing such a proposal, instead preferring to maintain current output levels.
Novak and ministers from other non-OPEC allies will be in the Austrian capital on Friday (today) to discuss an agreement.
Russia’s appetite for deeper production cuts has been far from certain in recent weeks. Moscow is reportedly in favour of an extension to the current level of cuts rather than a further reduction.
The new cuts may further worsen the economic situation unless Nigeria finds other income sources through taxes or growing non-oil income.
“With the central government’s 2019 fiscal deficit of $13 billion (vs total spending of $25 billion), can we really afford to cut oil exports any further?” asked Seun Smith, an energy analyst, in a social media post.
Data from the Central Bank of Nigeria show that the Federal Government recorded a shortfall in its income by N4.62trn in the 2019 fiscal period.
The 2020 budget was based on oil production of 2.18 million bpd with an oil price benchmark of $57 per barrel. The government may review this projection, Ben Akabueze, director general, Budget Office, indicated on Wednesday.
“If we cannot find any alternative revenue sources to make up the shortfall, we will then also have to revise down the expenditure projections,” Akabueze said.
A report by IHS Markit, a research firm, says oil producers like Nigeria face the biggest drop ever in demand for their product with forecasts now suggesting demand collapse levels that will be steepest on record and far worse than during the 2008 global financial crisis.
According to sources, about 70 percent of April-loading cargoes from Angola and Nigeria have yet to find buyers, a marked decline from the normal pace of sales.
“The unsold lots will be competing against millions of barrels that were slated for export this month but have yet to be purchased,” sources said.
They estimate that 55 Nigerian cargoes and 18 Angolan have yet to find buyers.
The two nations are due to ship almost 100 cargoes next month, meaning the rate of unsold consignments is about 70 percent. By this time in a normal trading cycle, 50 percent of the oil should have been sold, the traders said.
Coronavirus fears have already driven oil into a bear market, with Brent, the internationally traded benchmark crude, falling Thursday to $51.55, more than 24 percent below its recent peak in early January.
Prices of benchmark Brent crude are down around 20 percent this year, as concerns mount over how the coronavirus could dent global energy demand and exacerbate an existing supply glut.
Analysts say Nigeria should ramp up efforts to diversify the economy as over reliance on crude income exposes the economy to shocks.
“We need to take efforts to diversify the economy more seriously and implement policies that help us get private capital because it’s the way to go,” Muda Yusuf, director general, Lagos Chamber of Commerce and Industry, recently told BusinessDay.
ISAAC ANYAOGU & DIPO OLADEHINDE
