Nigeria should be worried as oil prices continue downward trend

The second half of 2018 has seen a highly volatile crude market, with prices reaching a four-year peak before they went into their longest stretch of loss in 30 years. Everyone who thought oil was headed for $100 is having a rethink as Saudi Arabia, Russia and the United States continue to pump more oil. Another producer, Qatar, will soon be free to pump oil as it wishes, as it plans to leave OPEC, the cartel responsible for 44 percent of the world’s crude. With its 600,000 barrels per day production, Qatar’s decision is unlikely to have any impact on oil prices, but it may affect the future of oil, and the future of Nigeria, a country that still relies oil to fund more than 80 percent of its budget.

Qatar has been a member of OPEC since 1961 and its decision to leave might have been due to worsening relations with the bloc’s de facto leader Saudi Arabia, which led a political and economic boycott of Qatar in 2017. However, Qatar denies issues with Saudi influenced its decision.

Saad al-Kaabi, the country’s energy minister, who told a news conference on Monday that Qatar has decided to withdraw its membership from OPEC effective January 2019, explained that the Arab nation wants to “focus its efforts on plans to develop and increase its natural gas production”. The country wants to increase its production of liquefied natural gas to 110 million from 77 million tonnes a year. It will attend its last OPEC meeting this week, where members are expected to agree to cut production, after oil prices fell 30 percent since October. US crude fell below $50 a barrel, while Brent crude sold below $60 per barrel last week, from $86 in October. However, prices improved early on Monday, with Brent up to $61.65 and US crude selling above $50 following news that Russia and Saudi Arabia had agreed to cut production, prices dropped slightly on Wednesday, ahead of the OPEC meeting in Vienna.

The exit of Qatar from OPEC, while it may not affect the cartel, weakens it and throws into question its role after it needed non-members to push through a production cut in 2016 following crash of prices to as low as $30 a barrel.

While Saudi Arabia extends a hand of friendship to Qatar which might make the latter reconsider its decision to leave OPEC, Saudi also has Iran to worry about. The Islamic republic is one of the most sidelined major oil producers, due in part to US sanctions on the country leading to a drop in exports. As OPEC meets to decide on a cut, which some have estimated at about 1.4 million bpd, Iran will not be joining in the cut. The country’s OPEC Governor Hossein Kazempour Ardebili Kazempour told Reuters that those who increased production should be the ones to cut. Saudi Arabia, Russia, the UAE and Kuwait have all increased production.

However, if OPEC is unable to unanimously vote curtailing production, Kazempour said the bloc’s failure might send oil prices crashing to $40 a barrel. $40 oil is bad news for Nigeria!

The price of OPEC basket of fifteen crudes, which includes Nigeria, stood at $60.64 a barrel on Monday, about $10 above the $51 per barrel crude oil price benchmark set by the Nigerian government for its 2018 budget and just a little above the Nigerian government’s 2019-2021 Medium-Term Expenditure Framework (MTEF) benchmark of $60 pb. If prices get lower than they already are, it poses a major risk to Nigeria’s economic projections for next year and its MTEF. Even worse, if oil plunges to $40 pb.

The impact of cheap oil on Nigeria could be huge. Apart from affecting government revenues, which is largely crude-based, Nigeria’s currency may also suffer. The Central Bank of Nigeria (CBN) has been shoring up the naira with the country’s Forex reserves. This may become difficult when the country’s top foreign exchange earner stops bringing in as much Forex as it used to.

“The improvement in liquidity and relative stability in forex market witnessed by businesses in 2018 will come under threats due to declining receipts from oil,” Muda Yusuf Director General, Lagos Chamber of Commerce and Industry told Nigeria’s Vanguard newspaper.

“This will have profound impact on the prices of imported goods and services leading to likely increase in the rate of inflation,” he added.
It is, therefore, in Nigeria’s best interest that the OPEC meeting starting tomorrow in Austria, ends with an announcement of a cut in oil production to boost prices. The country will also do well to accelerate its diversification drive, so as to reduce reliance on oil like Iran, which claimed that the current could run without oil.