Nigeria faces more economic pain as oil price hits 4-month low

Panic is beginning to spread through the oil market as the price of Brent, the benchmark for Nigeria’s crude oil, fell to a four-month low on Thursday as markets continue to struggle with oversupply due to growing lockdown restrictions across Europe.

On Thursday, Brent dropped 3.5 percent to $37.75 a barrel in London, the lowest since May 2020, while US crude dropped by 3.6 percent, to $36.

The market bearish signs are primarily due to a rapid rise in global coronavirus infections as two of Europe’s biggest economies reinstated some form of national lockdown.

There are already signs that road use in Europe is slumping, weighing on oil consumption as more than 5 million new Covid-19 cases were reported worldwide in the last 14 days, setting a new record since the pandemic started early this year.

Countries such as Switzerland, Italy, Bulgaria and Greece have closed or otherwise clamped down again on nightspots and imposed other restrictions such as curfews and mandatory mask-wearing. Madrid and other parts of Spain banned all but essential travel in and out of their regions.

“The increase in oil production led to an unexpected build of crude oil, and given the additional lockdowns we are seeing in Europe, that is just further heaping bad news on the oil market,” said Andy Lipow, president of consultants Lipow Oil Associates.

Apart from second Covid 19 wave threaten oil demand, other market bearish signs includes rising U.S inventories and increased oil supply from Libya.

This development will not only threaten the financial stability of Nigeria’s 36 states who are heavily reliant on federal allocations to pay their bills, but also significantly hamper the implementation of the federal budget, putting an already battered economy in worse shape.

“Nigeria’s current account deficit and the exchange rate will remain under pressure longer than expected and have a negative effect to different upstream projects across the country,” Charles Akinbobola, analyst at Lagos-based Sofidam Capital, said.

Data compiled from the breakdown and highlights of 2020 budget performance presented by the Minister of Finance, Budget and National Planning, Zainab Ahmed, showed that in the first seven months of 2020, Nigeria recorded N2.5 trillion in revenue and spent about N6.25 trillion creating a record budget deficit of N3.7 trillion.

This triggered the first wave of devaluation in March 2020 as the Central Bank of Nigeria (CBN) devalued the naira by to N381 per dollar following the crash in oil receipts, Nigeria’s major foreign exchange earner after initially devaluing from N306/$, where it had been for over two years, to N360/$.

The COVID-19 pandemic also affected the income of Nigerians living abroad and looking to send money to loved ones back home as Q2 2020 data showed Nigeria recorded the lowest remittances from abroad since 2008.

According to the data from CBN, remittances fell to $3.3 billion in the second quarter of the year way lower than the average of $5.8 billion per quarter remitted to the country.

Also, Investment inflows into Nigeria fell to a three-year low in the second quarter of the year plunged to $1.29 billion, as the fall out of the global pandemic and a huge drop in oil price and production, heightened economic uncertainties in Africa’s most populous country.

Nigeria has also waited agonizingly for the now elusive $1.5 billion World Bank facility which it had hoped will help shore up its external reserves.

Already, poverty has more than doubled in the last five years, placing Nigeria ahead of India as the poverty capital of the world despite having less than a third of India’s population, according to a Brookings Institution report.

The Nigerian economy contracted by 6.1 percent in Q2 2020, from a growth of 1.87 percent in the preceding quarter, to record its worst quarterly performance on record, the National Bureau of Statistics (NBS) noted.