It could be 2016 again for the Nigerian economy, or even worse, as Saudi Arabia’s sudden oil price war in response to Russia’s hard ball over production cuts threatens to send oil prices tumbling towards unprecedented lows.
In 2016, Nigeria slipped into its first recession in 25 years and was forced to devalue the currency by more than 40 percent all because crude oil prices had fallen off a cliff.
The banking sector was worst hit as loans to the oil and gas sector, a third of total loans, went bad and lenders lost a chunk of their capital.
Stocks sold off and Nigeria’s risk premium hit new peaks as investors demanded higher to hold Nigeriam assets from local bonds to Eurobonds. Nigeria bled.
It’s 2020 and the current oil price rout means a similar scenario is well on the cards in Africa’s top oil producer which could translate a second recession in four years. This comes at a time when the pain from the last recession is still being felt in an economy that has grown below its population growth rate since 2015, thereby leading to rising poverty levels.
“There’s likely to be a massive Nigeria sell-off on Monday as investors react to the sharp downturn in oil prices,” said Wale Okunrinboye, head of investment research at Lagos-based Sigma Pensions said.
“Oil prices could go as low as $30 and that could plunge the economy only into a recession very quickly and create all sorts of problems for the fiscal and monetary authorities,” Okunrinboye added.
Brent crude, the global oil benchmark, closed down 9.4% on Friday, its biggest daily drop since the global financial crisis in 2008, settling at $45.27 a barrel.
Oil traders are looking to historical charts for an indication of how low oil prices could go. One potential target is $27.10 a barrel, reached in 2016 during the last price war.
Some analysts however believe the market could go even lower than the 2016 mark.
Roger Diwan, an oil analyst at consultant IHS Markit Ltd. and a veteran OPEC watcher, told Bloomberg that the price could fall below $20 a barrel.
Brent crude, the global benchmark, fell to a low of $9.55 a barrel in December 1998, during one of the rare price wars that Saudi Arabia has launched over the last 40 years.
“We are at one of the most uncertain times in the history of Nigeria’s financial market, no one really knows what to expect but one thing that is clear is that Nigerian risk went off the roof the moment Saudi started the oil price war,” a money manger who did not want to be quoted due to the sensitivity of the matter said.
“Dont be surprised if everyone wants to get out first and ask questions later and that could really unravel the economy and hurt the naira,” the person said.
Oil prices at the current level is already below the federal government’s budget benchmark and has necessitated a review. It is also below the CBN’s resistance level which could spell a naira devaluation given that external reserves remain on the decline and has now touched $36 billion.
“Nigeria did not plan for a shocker of this magnitude,” said Bismarck Rewane, a leading economist.
“First, no one saw oil prices falling to as low as $45 per barrel or Saudi going for a price war, and that throws every other projection from economic growth to FX out the window,” Rewane added.
Nigeria has itself to blame of it is caught out due to an oil price slump once again like in 2016, having failed to reduce the country’s heavy reliance on crude oil.
Almost everything from economic growth in 2019 to the relative stability in the exchange rate have been due to crude oil prices trending higher from 2016’s low rather than government reforms.
Business leaders say the best response at this time of heightened uncertainty will be to finally push through the reforms that can help soften the blow of an oil price downturn.
Oil prices, which have tanked since the coronavirus outbreak capped Chinese demand, fell even steeper after Russia balked at a plan by OPEC to cap oil production to shore up prices.
To make matters worse, Saudi Arabia, the world’s largest oil producer, is preparing for an all out price war.
Saudi Arabia plans to increase oil output next month, looking to boost it well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its OPEC+ alliance with Russia.
Saudi’s price war started on Saturday by slashing pricing for its crude for foreign markets by the most in at least 20 years, offering unprecedented discounts for buyers in Asia, Europe and the U.S. to entice refiners to purchase Saudi crude at the expense of other suppliers.
The shock-and-awe Saudi strategy could be an attempt to impose maximum pain in the quickest possible way to Russia and other producers, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved.
