The debilitating effect of the coronavirus pandemic on the global economy is now rife, with oil prices crashing to a three-year low. Nigeria, an OPEC member and a major exporter of crude oil, is unfortunately caught in the midst of the unfolding consequences of Covid-19 and the oil war between Saudi Arabia and Russia, Nosa James-Igbinadolor writes
It was the biggest crash in oil prices in over 20 years. Global oil demand has only contracted in three years since 1985. No one saw it coming, yet the signs were palpable. It began with the coronavirus and as Bloomberg noted of the annual International Petroleum Week, a major oil-industry gathering in London, at the end of February, “the mood darkened as outbreaks from Italy to Iran forced traders to re-evaluate the virus’ impact on the global economy”.” Fewer trips to work, cancelled vacations and disrupted supply chains all meant reduced demand for fuel.
By late February, the IMF had slashed its economic growth forecast for Nigeria citing falling oil prices as it urged the country, Africa’s biggest crude oil producer to diversify its oil-reliant economy.
The fund has now cut its forecast for Nigerian gross domestic product growth this year from 2.5 percent to 2 percent “to reflect the impact of lower international oil prices…Under current policies, the outlook is challenging,” the IMF said.
By early March, commodity traders and oil companies had begun updating their internal forecasts, with some cutting 2020 demand growth to a range of 200,000 to 700,000 barrels a day, according to Bloomberg. By the end of the first week of March, oil prices had crashed more than 9 percent to their lowest level in nearly three years as major producing nations failed to agree on supply cuts aimed at addressing the collapse in global demand caused by the coronavirus outbreak.
By the beginning of the second week, Brent crude oil futures had tanked as much as 31per cent to $31 a barrel as Saudi Arabia ratcheted up pressure on Russia by slashing its list prices by the most in some 20 years. Saudi Arabia’s shock decision as talks on production cuts between OPEC and its allies ended unceremoniously.
Saudi Arabia’s decision to cut prices added to pressure on an oil market already reeling from a global economic growth slowdown at the hands of the coronavirus outbreak.
Goldman Sachs has since come out with a dire warning: $20 a barrel oil.
“The prognosis for the oil market is even direr than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus. This is the equivalent of a 1Q09 demand shock amid a 2Q15 OPEC production surge for a likely 1Q16 price outcome. As a result, we are cutting our 2Q and 3Q20 Brent price forecasts to $30/bbl with possible dips in prices to operational stress levels and well-head cash costs near $20/bbl,” Goldman Sachs oil strategist, Damien Courvalin, said in a note to clients as reported by CNN.
Courvalin added, “This completely changes the outlook for the oil and gas markets, in our view, and brings back the playbook of the New Oil Order, with low-cost producers increasing supply from their spare capacity to force higher-cost producers to reduce output.”
Then out of the blues, Saudi Arabia, the world’s top exporter, launched a price war over the weekend. The move followed the implosion of an alliance between the OPEC cartel, led by Saudi Arabia, and Russia.
Saudi and Russia had come together to form the so-called OPEC+ alliance in 2016 after oil prices plunged to $30 a barrel. Since then, the two leading exporters have orchestrated supply cuts of 2.1 million barrels per day. Saudi Arabia wanted to increase that number to 3.6 million barrels through 2020 to take account of weaker consumption.
But Russia, worried about ceding too much ground to American shale oil producers, refused to go along with the plan and his energy minister, Alexander Novak, on Friday signalled a fierce battle to come for market share when he said countries could produce as much as they please from April
OPEC Secretary-General, Mohammed Barkindo, speaking to reporters after the meeting broke up, said there was no consensus to extend the policy of supply restraint beyond the end of March and OPEC would not act unilaterally. Discussions would continue, he added but gave no further detail.
Africa including Nigeria is beginning to feel the effect of these major external shocks. According to Africa Confidential, three-quarters of Nigeria’s and Angola’s oil production earmarked for export in April is unsold. Similar deficits are reported from Chad, Republic of Congo, and Gabon.
Nigeria’s President Muhammadu Buhari signed the country’s N10.6 trillion ($29 billion) spending plan into law this year based on a crude price projection of $57 barrel, and targeted oil earnings of N2.64 trillion. Brent crude prices have plummeted about 45 percent this year to around $36 a barrel. With oil accounting for as much as 70 percent of total government revenue and 90 percent of export earnings, and with the 2020 budget based on an oil price of $57 per barrel, the Nigerian government was quick to scramble a review of the national budget.
Nigeria’s Minister of Finance, Zainab Ahmed, lamented the effect of the sprawling virus on Nigeria’s 2020 budget.
The country’s oil benchmark for 2020 is $57 per barrel of crude compared to current Brent crude oil prices of $45 per barrel, stoking fears of a widening budget deficit.
Ahmed stated, “The current crude oil price of $53 a barrel is below the budget benchmark. So what we are doing is studying the situation. We are committed to doing a midterm review. We are concerned about the current drop in oil prices because it’s now below our budget. We will do a mid-term review, and if the impact is so much, we will need to do an adjustment in the budget, working together with the National Assembly.”
The outlook is no doubt dire. Simply put the coronavirus and the attendant lower oil price will be raw for the budget, as it means less money is available for much-needed investment in infrastructure. An analyst, Mr. Obasesam Okoi, noted, “Arguably, the collapse of oil prices over the years not only poses a strategic danger to the country’s growing importance in the global economy but has been the new catalyst behind its domestic predicaments.”
Okoi further stated, “The far-reaching implication is that changes in the price of oil have the potential to instigate changes in domestic conditions, which can lead to protracted instability.” Nigeria’s forex market, he added, has been historically responding negatively to the fall in oil prices “as the local currency has dropped from the N363 per US dollar that it traded for a better part of 2018 to N370 per dollar. Should the fall in oil prices be sustained, it could lead to a shortage of the US dollar in the domestic market, further driving down the value of the naira.”
Head of Research at Sigma Pensions, Mr. Wale Okunrinboye, posits that Nigeria faces a perfect nightmare. “If oil averages $45 per barrel in 2020 and Nigeria does not take action to restrain import demand growth as we saw in 2019, then we could see the current account deficit go towards $20-25billion.
While the fiscal deficit will blow beyond the 3 percent statutory limit.”
The International Energy Agency (IEA) slashed its demand outlook by 1.1 million bpd due to the coronavirus outbreak and its impact on economies, assessing that oil demand was set to drop this year for the first time since the financial crisis in 2009.
“While the situation remains fluid, we expect global oil demand to fall in 2020 – the first full-year decline in more than a decade – because of the deep contraction in China, which accounted for more than 80 percent of global oil demand growth in 2019, and major disruptions to travel and trade,” IEA said in its March report. It is expected that demand for Nigeria’s oil will wane while future deals will close at a price much lower than Nigeria’s crude oil benchmark.
With the Central Bank of Nigeria’s reserves having decreased by 20 percent in the past two years to the lowest since November 2017, and may soon reach the psychological $30-billion threshold set by Governor Godwin Emefiele for the country to consider a devaluation, there is a legitimate fear that the plunge in oil prices is piling pressure on Nigeria to devalue the naira as dwindling export revenue depletes foreign-exchange reserves, curbing the central bank’s ability to support the currency. It is widely believed that the apex bank may start adjusting currency policy before it reaches that point.
Emefiele had last month said no adjustment of the naira was planned and that the bank would continue to sustain the value of the currency, even though its dollar reserve was shrinking. In February, the bank had introduced longer-term contracts on the naira in a move to attract more foreign inflows, shore up its dwindling dollar reserves and stave off a currency devaluation. The naira has come under pressure this year as importers demand dollars to feed Nigeria’s consumers and as market sentiment worsen by fears that the coronavirus outbreak would hit Chinese demand, one of Nigeria’s major trading partners, and dampen growth.
Jason Daw and Phoenix Kalen, strategists at Paris-based Societe Generale SA, warned that “the combination of a current-account deficit — previously due to strong imports, but now being compounded by weak exports — portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira”. This situation elevates the risk of the devaluation of the naira. Nigeria’s CBN has kept the exchange rate at the Investor & Exporter window at M360/$1 since 2017 when it last devalued.
And it goes beyond the monetary ecosystem. Analysts at SMB Intelligence wondered how the Nigerian government would be able to raise the $22.7-billion loan, which the National Assembly approved last week against the background of plummeting oil prices.
“This question is important because Nigeria’s Federal Government is hedging the repayment of those loans on oil sales. Even the financing for the Ajaokuta-Kaduna-Kano gas pipeline is hedged against assets that may soon be non-performing.
There is also the risk that as oil prices remain low, some of our oil wells may be shut as they become increasingly unprofitable. New investments (including the much-touted Mambila Power Project) could probably be frozen as a result,” they noted.
Already, the naira extended a decline in offshore trading last week, slipping 0.2 percent to 366.45 per dollar, the weakest level on a closing basis in almost three years. Yields on Nigeria’s 2049 Eurobonds climbed 11 basis points to 10.34 percent, a record, after soaring 149 basis points on Monday. The country’s benchmark stock index slumped 4.1 percent, heading for the lowest close since March 2017.
At the market level, no other country in Africa consumes more Chinese products than Nigeria, Alhaji Muhammad Dan Auta, spokesman for the Traders’ Association in the northern Nigerian city of Kaduna told German international public broadcaster, Deutsche Welle, “Chinese products are usually found in all parts of Nigeria”.
And that is the dilemma for Nigeria. With falling prices, lower oil sales and steeping government revenues, the near future looks very rough, if not eventful.