Stakeholders are worried over falling oil prices at the international market. As at last week, the price has dipped below the oil price benchmark for 2020 budget. Concerns are hinged on fears that sustained slide in oil price will threaten the implementation of the budget, reports EMEKA UGWUANYI.
The first trading week in the month saw oil price fell from over $60 per barrel to $51 per barrel. The price of the global benchmark grade – Brent Crude, only gained and rose above $54 per barrel on February 5, when news filtered out that the vaccine that prevents the deadly Coronavirus has been developed.
However, even at $54 per barrel, the price is still below the $57 per barrel budget benchmark on which Nigeria’s N10.6 trillion 2020 budget was based. The Coronavirus threat in China has been blamed for the dip in oil prices.
The sliding oil price portends serious negative economic implication for Africa’s most populous nation, which depends majorly on proceeds from oil exports for sustenance of its economy. Currently, the country is experiencing a revenue shortage and a budget deficit of 1.52 per cent to the estimated gross domestic product (GDP).
Nigeria’s problem beyond Coronavirus
There is more to the problem of budget implementation aside coronavirus and the consequent fall in price of crude. Not only is crude oil price low, but Nigeria is also being restricted by the Organisation of Petroleum Exporting Countries (OPEC) from meeting the 2.18 million barrels of crude per day on which the 2020 budget was based.
The restriction is due to OPEC’s last December output cut of 1.7 million, which was taken to forestall crude inventory buildup that was not favourable to prices.
There is probably more to worry about because the virus is yet to be contained.China is among Nigeria’s top 10 foreign trade partners that buys crude oil which it uses to power its industries. But as Coronavirus threat has resulted in many Chinese companies remaining shut down, which results in less oil consumption, this is not good for a country like Nigeria that needs to export crude to China in order to earn foreign exchange.
Another issue to worry about is the likelihood of further output cut for OPEC member countries. A recent report noted that the oil cartel is planning further large production cut of about 500,000 barrels to cushion the effect of the collapsing price, which the Coronavirus has occasioned. As an OPEC member, Nigeria is required to comply with OPEC’s output cut, which in turn means that it could soon be exporting lesser barrels, far below its 2020 budget benchmark.
Why OPEC may not change output cut soon
In the meantime, Nigeria is looking to raising money through various means, including exploring tax options that were hitherto unexplored. Nigeria is also borrowing money to finance the budget, with the Finance Minister insisting that the country does not have a debt problem despite the rising debt.
The budget oil price benchmark was based on reference price of $57 per barrel with the expectation that the volatile market could remain stable for the greater part of the year.
Stakeholders’ views
To the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf, noted that the sustained decline in oil prices since late last month, has been as a result of weak energy demand from China following the outbreak of coronavirus. He said oil price, which stood at $54.6 per barrel as at last week, is now below the budget benchmark of $57 per barrel, and this has serious implications for our fiscal and external position as a nation.
According to him, the continuous drop in global oil price put the realisation of the Federal Government revenue projections in the 2020 budget at risk. ‘’We note that the Federal Government intends to generate N2.64 trillion from crude oil in 2020. We also have the problems of lower crude production and there is likelihood that OPEC and its allies will deepen production cut to support oil prices,’’ he added.
The LCCI chief said: “The implication is that we will be forced to produce below our current quota of 1.77 million barrels per day (mbpd). If this happens, we will have to struggle with relatively low oil production and prices.
“This means lower revenue for the Federal Government to carry out its obligations. In the circumstances, the Federal Government may be propelled to raise additional debt to finance the budget, which would further worsen our debt portfolio and fiscal position.
“We note that the downward movement of oil prices would weaken our foreign reserves. Our external reserves depleted by $129 million in the final week of January 2020. This might affect the capacity of the Central Bank of Nigeria (CBN) to inject liquidity in the currency market, which would further put the exchange rate under pressure. There is also the risk of exchange rate depreciation which would also put pressure on prices.
“Overall, this development once again underlines the fact that we are still vulnerable to external shocks and should oil prices tumble, the economy may risk another recession.
“We have had warnings from the International Monetary Fund (IMF) and World Bank as well as Fitch and Moody on the need to diversify the economy to high-impact non-oil sectors to stimulate growth and attract investments. We note the intervention of the Central Bank of Nigeria in this direction, especially in addressing the challenge of high interest rate and access to credit.”
Also, the Chairman, Major Oil Marketers Association of Nigeria (MOMAN), Mr Tunji Oyebanji, said: “If you have planned some certain revenue based on the oil price and the oil price is no longer reaching that amount, what that tells you is that your budget is already in trouble.
“Already, you are borrowing so much for your finances, so your borrowing is either to increase even beyond the level that it has reached, or you have to reduce your expenditures, therefore, you will not be able to achieve the objectives that you have set out in your budget.
“So, it’s unfortunate that the country so much depended on oil, and immediately there is fall in price, you start having budget and revenue pressures, and your chances of having successful budget circle will reduce significantly.’’
Oyebanji, who is also the Managing Director/Chief Executive Officer, 11 Plc, said there will be pressure on the naira because “we don’t have dollars as much again.”
To address the issues, Oyebanji said: “It is like every other company or individual. If your revenue is not coming as expected, you have to reduce your expenditures but unfortunately for us as a country, we have increased the minimum wages, we have continued to subsidise petroleum product and power and borrow more money and service the increase, so the end result is that money that the will be spent on capital and infrastructures is going to be reduced. Because the other overhead had taken the money as well as the high wage government has to pay for, the only thing government can do is to cut recurrent expenditures.
“The government has to reduce its expenditure, if it wants to continue to meet its mandate. If the government is infrastructure handicap, it means that they have to reduce their expenditure but it also has some implications.
“All these big salaries people earn and government officials travelling with entourage of over 50 people outside the country have to be addressed. Meanwhile, our population is growing, all these do not go well with the country.”
Foreign analysts
According to Peter Hanks, Junior Analyst for DailyFX.com, crude oil narrowly escaped bear market territory, defined as a decline of 20 per cent or more from a recent high, on February 5 as it climbed from the previous day’s lows of about $49.50 to reclaim the $51 mark. While crude has escaped the technical designation of a bear market for the time being, the commodity’s outlook remains in question.
The spread of Coronavirus has resulted in quarantined cities and reduced economic activity in China, a key source of crude oil demand. In turn, crude oil prices plummeted and have been buoyed by technical support around $50 and the potential for deeper production cuts. To that end, OPEC officials engaged in meetings last week to discuss possible options for the members to pursue. If the group can agree to further reduce production, it could result in a boost in crude oil prices, but Russia has already voiced opposition.
That being said, the prospect of deeper production cuts providing a lifeline for crude oil prices looks thin at the time being. Therefore, the growth-linked commodity may struggle to reclaim lost ground until virus fears cool and growth forecasts level off. If a rebound does occur, initial resistance may reside around $53.90, followed by the Fibonacci level at $55.57.
On the other hand, a break beneath – and daily close below – the psychologically significant $50 could translate to further crude oil weakness. Should it occur, subsequent support is rather sparse which could see losses accelerate toward the December 2018 low around $42.43.
Oil prices jumped more than two per cent after media reports that scientists had developed a drug against the fast-spreading coronavirus that continues to weigh heavily on global economic activity.The World Health Organisation (WHO) played down the media reports, saying there is “no known effective therapeutics” against the virus.
Lending further support to oil was news that OPEC and its producer allies are considering further output cuts to counter a potential squeeze on global oil demand.
China’s Changjiang Daily newspaper reported on February 4 that a team of researchers led by Zhejiang University Prof. Li Lanjuan had found that drugs Abidol and Darunavir can inhibit the virus.
Separately, Sky News reported that a British scientist has made a significant breakthrough in the race for a vaccine by reducing part of the normal development time from two to three years to only 14 days.
Still, refineries, including China’s Sinopec, Asia’s top refiner, have slashed throughput as the virus cuts demand for refined fuels.
Fears of a slump in global oil demand had pushed U.S. crude and Brent futures into contango – a structure in which longer-dated oil futures trade at a premium that encourages traders to keep crude in storage for more profitable resale in the future.
“Based on our forecast that China’s GDP growth will slow to just three per cent year-over-year in first quarter (Q1) 2020 and assuming that the virus is brought under control relatively quickly, we have tentatively pencilled in a 10 per cent drop in the country’s oil consumption in Q1,” Capital Economics analysts said, adding: “This pushes the global market into a small surplus in the first half of 2020.”
Falling demand for jet fuel worldwide because of the deadly coronavirus has also hit U.S. prices for the product, which dropped to their lowest seasonally in five years, market participants said. Companies including Royal Dutch Shell and Phillips 66 have limited business travel to China.
Demand impact
A slowdown in the global economy resulting from the outbreak is expected to reduce 2020 worldwide oil demand growth by 300,000-500,000 barrels per day (bpd), about 0.5 per cent of total demand, BP’s Chief Financial Officer Brian Gilvary said.
“The Chinese economy will be weakened for some time to come as quarantines, social distancing and travel restrictions remain in place,” BNP Paribas analyst Harry Tchilinguirian told the Reuters Global Oil Forum.
“But as financial markets are anticipatory, one can see how favourable news in relation to potential medical solutions, or indications that we have reached a turning point in the progress of the virus outbreak, are likely to be interpreted positively.”
OPEC and allies led by Russia, a group known as OPEC+, considered the impact on global oil demand and economic growth from the coronavirus at a meeting on Wednesday.
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