Oil demand is contracting and projected to fall below $20 a barrel, a situation that could wipe out half of Nigeria’s current revenue, and possibly trip the country into another recession.
The international benchmark Brent crude fell below $30 a barrel Monday for the first time since 2016. This is a shocking 54 percent drop year-to-date sending risk assets reeling around the world.
Goldman Sachs slashed its oil forecast on Tuesday as the COVID-19 outbreak continues to pressure demand. Analysts at the Wall Street investment bank say oil demand is contracting by an unprecedented 8 million barrels a day on the back of the coronavirus and the botched response by OPEC members and their allies setting off a price war.
“Demand losses across the complex are now unprecedented,” Goldman’s global head of commodities research Jeffrey Currie wrote in a note to clients Tuesday.
Goldman now sees international benchmark Brent crude at $20 per barrel with US West Texas Intermediate crude averaging $22 per barrel in the second quarter with. This is Goldman’s second cut to price forecasts in less than two weeks.
WTI settled at $28.70 on Monday, so the new target implies an additional 23 percent downside ahead. This would be on top of WTI’s 53 percent drop this year. Goldman’s Brent target is 33 percent below the contract’s Monday settle of $30.05.
“The last time there was a global surplus of this magnitude was never,” Jim Burkhard, vice president and head of oil markets at IHS Markit, wrote in a note Monday, predicting an oil demand contraction of up to 10 million bpd for March and April.
“Prior to this, the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more.”
Nigeria could suffer some of the worst impacts as lower oil prices threaten allocations to federal and state governments, which will constrain their ability to service debts and pay salaries.
The outsized nature of Nigeria’s government means that dwindling revenue has dire consequences for the economy as government’s inability to finance critical projects and make budgetary disbursement would shrink the economy and crimp private enterprises that rely on government contracts.
This could lead to businesses struggling amid falling demand and the capital market could be hit further with the border closure compounding the woes of companies in the country.
Nigeria is struggling to sell its oil cargoes in a market already dripping with oil. Chinese and European refiners currently hunkering down over the coronavirus are being courted by Saudi Arabia who is offering its oil at bargain prices.
About 70 percent of April loading cargoes from Angola and Nigeria have yet to find buyers, according to a Bloomberg report. These unsold volumes would be competing against millions of barrels that were slated for export in March and yet to be purchased.
Lower oil revenue will lead to fall in Federal Allocations for the three tiers of government. In addition, Nigeria’s foreign exchange reserves could drop further, intensifying its fiscal crisis and adding pressure on the Naira, analysts say.
At an average oil price of $68.26 in December 2019, the federal and state governments in Nigeria shared N647.3 billion with oil contributing to a significant chunk of the figure.
Crude oil sales accounts for 75 percent of government’s earnings and 95 percent of foreign exchange. As oil prices look to fall below $20, FAAC allocations could be cut by half in April when the current OPEC+ agreement ends next month.
Already global demand is declining as major international and US airlines cut their flights. 30 African countries have banned international flights along with many other American and European countries.
Millions of people all over the world are entering self-isolation or full-on lockdown in an attempt to curtail the spread of COVID-19 which has since killed over 6600 people and sickened over 168,000 in more than 140 countries.
Analysts warn that the oil market will tumble further, after April when not only the OPEC and non-OPEC members’ alliance falters, but when big-time producers began to flood the market with vast supplies in a price war.
Goldman said the sudden drop-off in demand, which began in January when the virus started hitting Chinese fuel demand, aided the price war that’s broken out between OPEC and its allies, which includes Russia.
“While it is tempting to view the COVID-19 oil demand shock and the oil ‘price war’ as separate events, we like to emphasize that OPEC+ pursuing a market share strategy is simply a second-order effect of the virus made possible by extremely weak demand, pushing the market far down the global supply curve,” Currie said.
Goldman added that the virus will likely lead to far worse outcomes than previously thought — even below estimates from just a month ago — for both the commodities and equity market from just last month.
But unlike equities, which the firm believes will swiftly rebound, oil will likely stay lower for longer.
“While financial markets are forward-looking and are likely to rebound once the contagion stabilizes, commodity markets are spot assets and must clear the surpluses developing today from weak demand and rising supply,” Currie said.
Saudi Arabia has said it would ramp production by over 12million barrels a day in April compared to the 9.7million bpd it did in February.
Russia’s energy minister also said recently that it can increase production by 200,000 to 300,000bpd in the short term and 500,000bpd in the longer term.
Timipre Sylva, Nigeria’s junior minister for petroleum resources also said last week that Nigeria will ramp production by over 2 million barrels a day.
To be sure, throwing gasoline at a burning fire is effective when the anticipated outcome is total obliteration, however, neither OPEC members nor their former allies including Russia can survive current efforts at self-immolation.
Russia claims it has buffers up to the tune of $550 billion but it cannot afford to run them aground without political consequences and Saudi Arabia with a huge subsidy system, needs oil at above $80 to keep the people from mutiny. Nigeria’s foreign reserves is a paltry $36bn and a quarter of that could be wiped off, if foreign investors pull their funds.
However, some analysts are of the view that a deal will be inevitable in the long-run.
“You cannot have the oil flowing if the global economy stops. It is simple. Storage will fill very quickly, and a deal will have to be made,” said Roger Diwan, vice president at IHS Market, a global energy intelligence firm.
Without a diversified economy and with little economic buffers, Nigeria’s economy needs all the hope it can get.
Meanwhile as crude prices continue to fall on the global market, the Presidential Economic Advisory Council (PEAC), led by Doyin Salami, has expressed concern over possible slower growth and recommended the revision of the 2020 budget to prioritise spending on health care, infrastructure and basic needs.
The PEAC stated this in a statement signed by presidential spokesman, Femi Adesina, after meeting President Muhammadu Buhari who also presided over an enlarged meeting of his Economic Advisory Council established to review the impact of Coronavirus and crash of crude oil prices.
The Salami-led team had while briefing government painted sobering scenarios of what could happen to the Nigerian economy if the Covid-19 pandemic lasted for too long.
The team expressed fears over possible “slower growth” occasioned by the dwindling world crude oil prices, on which Nigeria’s budget is heavily dependent.
They also see supply and demand sides of global economy being impacted negatively by the uncertainties, which would erode confidence, “governments acting unilaterally instead of cooperatively, further drop in oil prices, and lockdowns gaining grounds around the world.”
The PEAC said there would also be oil glut, trade imbalance, drop in foreign reserves, and rise in unemployment.
Noting that many countries round the world may go into economic recession, the PEAC advocated hard work for Nigeria to keep its head above the waters.
They recommended among others, a possible revision of the 2020 budget, with priority spending on healthcare, reprioritisation of expenditure on infrastructure to focus on projects nearing completion with pro-poor effects.
Others include curtailing recurrent expenditure, mobilising the private sector to strengthen health sector infrastructure, and boosting of government revenue.
ISAAC ANYAOGU & Tony Ailemen, Abuja
