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Adewale Sanyaolu
Nigeria’s economy appears to be in for bigger troubles over the next few months with the outbreak of coronavirus following reports that more than 50 cargoes of its oil are currently without buyers after Saudi Arabia and Russian authorities offered to sell their deliveries at ridiculously low discounts to buyers. The anxiety became heightened as Group managing Director of NNPC, Mallam Mele Kyari, declaring last Wednesday, at a Central Bank of Nigeria (CBN) Round Table discussion in Abuja that there are no off-takers for the 50 cargoes for now due to falling demand. “Today, I can share with you that there are over 12 stranded LNG cargoes in the market globally. It has never happened before. LNG cargoes that are stranded with no hope of being purchased because there is abrupt collapse in demand associated with the outbreak of coronavirus,” Kyari submitted.
Kyari outburst clearly lends credence to the fact that coronavirus has set the global economy on edge as most countries that depend on crude oil for industrial and economic activities have all scaled down their demand with several manufacturing firms shutting down operations in a bid to contain spread of the virus. Already, major foreign banks have equally slashed oil price forecast by $16 with Barclays becoming the latest to revise its oil price outlook for this year. The UK bank cut its forecast for Brent crude to $43 a barrel from $59, and for West Texas Intermediate to $40 from $54 previously.
“Oil markets face a moment of truth as disagreement between key OPEC+ members means unhinged supplies will likely overwhelm near-term market balances amid large-scale demand destruction due to virus containment measures,” the bank said in a note. Last week, Morgan Stanley also cut its outlook for Brent crude but not as much as Barclays because Saudi Arabia had not yet announced its price cuts and production growth plans. The investment banker said it expected Brent crude to average $55 a barrel in the second quarter, down from $57.50 earlier, and WTI to trade at around $50 a barrel, down from $52.50. Standard Chartered also cut its forecast on Brent and WTI this week. The UK bank now expects Brent crude to average $35 a barrel this year, down from $64 a barrel earlier. WTI is seen at $32 a barrel, down from $59 a barrel earlier. For Nigeria, the economy is already in a panic mode with the Senate constituting a joint-committee to engage the Executive on measures to stave off the negative consequences of crude oil price crash currently below $40 per barrel.
But the effect of a continuous slide in crude oil prices on the economy will lead to difficulties in funding the implementation of the N10.6 trillion 2020 budget predicated on oil price benchmark of $57 per barrel and a daily production of 2.2 million barrels per day (bpd). Already, analysts have warned that the slide in oil prices portends grace danger for the economy as it remained the largest contributor to government’s revenue.
Soaring oil inventories amid low refining capacity
Meanwhile amidst the new oil price rout sparked by the breakdown of the OPEC+ alliance, the Energy Information Administration (EIA) reported a crude oil inventory buildup of 7.7 million barrels for the week to March 6. This compares with a moderate buildup of 800,000 barrels for the previous week. The EIA also reported a sizeable gasoline and distillate fuel draws for the week to February 28. For the week to March 6, fuel inventories registered hefty inventory draws.
In gasoline, the EIA reported an inventory decline of 5 million barrels for the first week of March, versus a decline of 4.3 million barrels for the previous week. In distillate fuels, the EIA reported an inventory fall of 6.4 million barrels for the week to March 6, versus a fall of 4 million barrels for the week before.
Refineries last week processed 15.7 million bpd, producing 10 million bpd of gasoline and 4.7 million bpd of distillate fuel. This compares with 9.8 million bpd of gasoline production the previous week, and 4.6 million bpd in distillate fuel production.
Though, oil prices have recouped some of their losses it’s nowhere near enough to settle a jittery market after the partnership between Russia and Saudi Arabia broke down two weeks ago with both now set on increasing production, in Saudi Arabia’s case to more than their respective production capacity. And yet, despite the break-up of the OPEC+ production cut agreement, “the doors aren’t closed” to future cooperation between Russia and OPEC, Russia’s Energy Minister Alexander Novak, told local news channel Rossiya 24 on Tuesday.
“The fact that the agreement was not extended beyond April 1 doesn’t mean that we cannot cooperate with OPEC and non-OPEC producers in the future. We signed a charter last year and we will continue cooperation as part of it,” Novak said. This means not all is lost in oil production control but before things get better, they may well get worse, with independent U.S. shale producers bearing the brunt of the price row because of their high debt levels and rising breakeven prices. This, however, means U.S. production growth may slow down, which would be positive for prices regardless of how the price war develops.
FG in a fix
It is however, ironic that while countries with lower oil production cost are not feeling much of the heat as they are getting patronage for their oil through further discounts, Nigeria remains at the receiving end as its high production cost of $17 per barrel compared to that of Saudi Arabia at $5 per barrel appears to have further put it at a disadvantaged position. The NNPC boss however pointed out that in the face of the coronavirus global pandemic, countries like Saudi Arabia have given discount of $8 and Iraq $5 to their off-takers in some locations, meaning that when crude oil sells at $30 per barrel, countries like Saudi Arabia is selling at $22 per barrel and Iraq selling their crude at $25 per barrel.
Experts raise alarm
Reacting to the likely impact of falling crude prices with the outbreak of the COVID-19 on the Nigerian economy, Dr. Muda Yusuf, Director General of Lagos Chamber of Commerce and Industry (LCCI) stated that the sharp drop in crude oil price could lead to dislocations in the 2020 budget.
According to him, “this sharp drop in revenue could cause significant dislocations in the budget, especially for an economy already grappling with challenges of weak revenue performance.
“There is also the revenue effect of the coronavirus which is related to the drop in oil price. Oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings. With the current scenario of tumbling oil price, a drastic reduction in the revenue of government may become inevitable in the near time. “This has implications for the level of fiscal deficit in the budget; as its implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted.”
He said oil revenue accounts for about 85 per cent of foreign exchange earnings and is the major driver of accretion to the foreign reserves. The sharp drop in oil price and the associated adverse expectations will put fresh pressures on the reserves.
“Currently, (the reserve) is at an all- time low of $36.2 billion as at March 3, 2020 and this outlook will weaken investor’ confidence and generate speculative pressures on the currency; It will also result in the depreciation of the Naira exchange rate; It will trigger inflationary pressures, increase production and operation costs for businesses and It will weaken purchasing power and ultimately undermine the welfare of the citizens,” he said. He argued that global supply chain has already been severely affected as China, which is the second largest economy in the world, is a major supplier of inputs for manufacturing companies around the world.
Nigeria is not an exception to this experience. Many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs. “This has implications for capacity utilisation, employment generation and retention and adequacy of products’ supply to the domestic market. There is also an implication for inflation,” he said.
For his part, Mr. Ayodeji Ebo, the Managing Director of Afrinvest Securities Limited, said there is cause for worry.
He said if the crisis of COVID-19 continues for some time, China’s demand for crude oil from Nigeria will drop. But as crude oil price continues to nosedive, Nigeria’s revenue will drop and economic growth will stall.
“The issue here is that there is no solution in sight for coronavirus and it is affecting demand for crude oil globally, especially in China. If it is further prolonged then it will have negative consequences on Nigeria in terms of revenue and implementing the 2020 budget will be a major challenge.
“It means deficit would increase, and as a result if you are unable to finance most of the capital expenditure that you have, then you don’t expect much growth in the economy. There is cause for worry because if this is sustained for some months, the CBN will have no other choice than to devalue the naira.
“This is because once the reserve crosses below $35 billion, foreign investors will begin to retract. Though the CBN threshold is $30 billion but most people will not wait until it gets to $30 billion. And the rate at which it has been depleting on the average of between $300-$400 million per week is significant. If the global crisis in terms of corona virus persists for long then it will have a major impact on Nigeria’s revenue thereby affecting potential growth of our fragile economy.”
Also commenting, partner, Bloomfield Law Practice, Mr. Ayodele Oni, said there is big trouble for Nigeria, especially in the face of the recent approval of the Senate for the country to borrow about $22.7 billion which will further put the economy under pressure as it battles to service existing loans under a low oil price regime.
He hinted that the CBN in the wake of the development, may be compelled to devalue the naira if the trend continues over the next two month Oni,however said the falling oil price may be a low hanging fruit for the country as payment of oil subsidy will drastically reduce, even though that may not have much impact.
