Nigerian on the edge as Brent crude prices crash to 2-year low

by Tunji Andrews

Tuesday saw oil prices crash, posting it’s biggest one-day drop in two years on signs that the Organization of the Petroleum Exporting Countries was unlikely to cut production in response to lower forecast demand. Brent crude prices which have tumbled more than 20% since mid-June, trading on Tuesday at $83 per barrel, have prompted analyst indications that the Nigerian government will consider tighter measures on the expenditure side of the economy in order to reduce the shocks from the dwindling crude oil revenue.

The fall in prices has been blamed on a glut of crude in the market, partly driven by the US shale boom, combined with weakening oil demand, which has pushed the price of oil to its lowest level since 2010.

Industry pundits had expected that members of the Organization of the Petroleum Exporting Countries would collectively cut production, which would have been a prompt move to bring supply and demand back in line and likely spur a rebound in prices. But a rift within OPEC, which controls about one-third of global oil supplies, is making a reduction in oil exports look less likely. OPEC’s biggest members are being seen as able to still produce and sell comfortably at prices as low as $70 per barrel.

If OPEC doesn’t cut production in November, prices could fall even lower in the next three to six months, said Alessandro Gelli, analyst at Diapason Commodities Management SA in Lausanne, Switzerland. He said, “These past four years, the main balance in the oil market was Saudi Arabia,” Mr. Gelli said. “They cut output alone these past four years, and now they want also the other OPEC members to intervene.”

Global head of commodities research at Citigroup Inc. Ed Morse, indicated that even at current prices, it was unlikely that it would lead to a decline in U.S production, stating that even though many OPEC members need higher oil prices to balance their budgets, the US would not cut supply. U.S. producers need to keep drilling, he said. “It would be a tough struggle to say who is going to get hurt more, the U.S. oil producer or the OPEC oil producer, at a significantly lower price than today.”

Nigeria may have to employ spending cuts, increase in non-oil tax collection and even work out sales deals to attract buyers. With lower prices and no cuts in supply, producers across the world would need to get creative to attract buyers to their products. Also, a review of the current crude oil benchmark currently at $78.50 per barrel, alongside an accelerated rate of savings in the excess crude account may be considered.

brent-crude-chart

The losses to Nigeria based on budget estimations have been put at about N8billion daily in revenue. Minister of Finance Mrs Ngozi Okonjo-Iweala, speaking on Sunday at a press briefing at the annual meeting of the World Bank/IMF in Washington DC, had given indication that the government was already very aware of this, saying that Nigeria and other crude oil producing nations are facing serious shocks both from the price and quantity of the crude oil, however noting that the government will not be borrowing to finance its expenditure, despite the shortfall.

She said “There are three ways we can manage this; you can either go outside and look for resource, but we are not planning to do that. So I just want to make that clear. That is the pride we have. Ever since we have been managing the economy, we have not done that. What else we have to look at is our revenue and expenditure side to see how we are prepared. There are already some good news, because we are already ahead in trying to bring out some extra help from FIRS, we gave a target of half a billion dollars (N750bn). I am happy to announce to you that they have already hit N800 billion as at the end of the July.”

Speaking of other options to manage the anticipated shocks, she also said “The other ways are on the expenditure side and this is where we have to plead; this is not a situation created by any one of us but all Nigerians should see openly, something that the DG Budget and I have been saying for quite some time is we have to be very careful to build up what we call a buffer. All of you know the buffer we have as excess crude account. We have to build it up so that if we experience any shock we can now use it. The IMF told us we need buffer of $6.2 billion dollars and we are at a buffer of about $4.1 billion now”.

Analysts believe that it’s a matter the FG and the National assembly need to collaborate on in other to safeguard Nigeria from shocks to the economy. Kumi Oyedele, an Economist and MD of Africa Analysts, said “We are treading unclear waters at this time, reports say that in the MTEF being presented by the FG has a crude oil bench mark of $78, just a $0.50 reduction from the 2014 benchmark. I would have felt a more sensible benchmark would be at $70 per barrel, to accommodate the budget and still make room for savings; seeing that the price of crude has dropped to as low $83 per barrel.”

He urged the government to also cut down on recurrent spending going into 2015 by reducing the number of MDAs in operation.

On the reverse though, when intimated on the possibilities of lower pump prices as a result of this slump in global crude prices, many Nigerians hope that the slump persits and translates into lower pump prices on kerosene, petrol and diesel. Kayode Oyelade, a barber in the Ogba area of Lagos state hopes the price slump continues. He said “Budget doesn’t affect my life, so it doesn’t concern me if the government doesn’t have money. My own concern is that I can buy petrol at a cheaper price to run my business.”

He added that if the price of petrol reduces, it would also help his customers, as he would be able to cut down his own prices.

 

 

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