• Nigeria’s Bonny Light price drops to $46.33 per barrel
• FG moves to review $57 budget projection
By Udeme Akpan & Prince Okafor
With increased commitment of the Organisation of Petroleum Exporting Countries, OPEC, to its Declaration of Cooperation, DOC, a programme dedicated to cutting output in OPEC member states and non-OPEC participating nations, many oil market watchers had expected the market to be relatively stable in 2020, at least for a reason.
The withdrawal of excess oil was expected to firm up supply, leading to a stable market, price, and revenue.
Nevertheless, that was not to be. The outbreak of Coronavirus in China, a major oil-importing nation, has crippled the market, leading to a significant drop in global demand, and by extension price. The spread of the disease to other nations has also reduced economic and other activities, thus worsening the already very bad situation, which witnessed oil price, falling from about $60 in January to over $50 in February 2020.
However, the 178th (Extraordinary) Meeting of the Conference of OPEC, which took place in Vienna, Austria, on March 5, 2020, under the Chairmanship of its President, Mohamed Arkab, Minister of Energy of Algeria and Head of its Delegation, was expected to find lasting solution to the situation.
In its statement sent to Vanguard, OPEC, stated: “The Conference reviewed the report and recommendations of the Joint Ministerial Monitoring Committee (JMMC), whose work continues to be ably supported by the Joint Technical Committee (JTC) and the OPEC Secretariat.
The Conference took note of oil market developments since it last met in Vienna on 6 December 2019 and reviewed the oil market outlook for the remainder of 2020.
“It noted the positive ramifications of the decision to further voluntarily adjust production at the 177th Meeting of the Conference, and subsequently the 7th OPEC and non-OPEC Ministerial Meeting, with market sentiment improving in the weeks thereafter.
“However, the COVID-19 outbreak has had a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the first and second quarters. Global oil demand growth in 2020 is now forecast to be 0.48 mb/d, down from 1.1 mb/d in December 2019.
Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside.
The Conference noted that the further impact of the COVID-19 outbreak on oil market fundamentals necessitates further continuous monitoring.
A few hours after, OPEC added: “In view of market developments and following OPEC’s 178th Extraordinary meeting today, the Heads of Delegation of the OPEC Conference held further consultations and decided to recommend extending the duration of the proposed 1.5 million barrel per day additional adjustment until the end of 2020, instead of 30th of June 2020.
“The consultations, monitoring and constant review undertaken of current market conditions demonstrate the strong commitment of OPEC Member Countries to work together to restore oil market stability. Declaration of Cooperation members are determined to jointly rise to meet the current pressing challenge.”
However, the oil market has not responded to OPEC’s decision, as Vanguard’s survey showed that oil price continues to enjoy a free fall.
For instance, the price of Bonny Light, Nigeria’s premium oil grade, dropped from about $58 before the meeting to $46.33 last Sunday, indicating $10.67 below this year’s $57 budget benchmark.
Responding to the situation, the Minister of Finance, Budget and National Planning, Zainab Ahmed, while interacting with State House correspondents at the end of the meeting of the Federal Executive Council in Abuja, said: “We are concerned about the current drop in oil price because it’s now below our budget.
I am glad to inform you that our oil production as of today is two million barrels per day and at times slightly higher. That in its self will be a cushioning effect for us in the current oil price.
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.”
In his address to the National Assembly, President Muhammadu Buhari, had stated: “Distinguished and Honourable Members of the National Assembly, the 2020-2022 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) set out the parameters for the 2020 Budget.
We have adopted a conservative oil price benchmark of US$57 per barrel, daily oil production estimate of 2.18 mbpd and an exchange rate of N305 per US Dollar for 2020.”
“As at Friday, 6th March 2020, crude oil price has fallen to all time low of $45.27 per barrel, the lowest since 2017. Oil price budget benchmark for 2020 budget was $57 per barrel.
“This sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers. It is instructive that the Finance Minister is contemplating a review of the underlying assumptions of the 2020 budget, and rightly so.
“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 has become inevitable in the near time.”
This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy.”
However, he urge the government to diversify the economy through giving much priority to agriculture, mining, trade and other sectors of Nigeria’s economy.