A Review of the Nigerian Energy Industry

Anxiety as crude oil prices slump to 6-year low

23 August 2015, Lagos – Between Wednesday last week and the close of work on Friday, members of the international business community, including Nigeria, were stunned as crude oil prices tumbled to almost $40 a barrel on Thursday, their lowest since the global financial crisis of 2009, as supplies rose in North America and the Middle East, filling stockpiles to record levels.

Oil continues to slide.
Oil continues to slide.

The impact of the sustained slump in oil price on Nigerian economy has been scary. Apart from desperate measures being put in place by the Central Bank of Nigeria (CBN) to halt the pressure on the nation’s foreign reserves as a result of the erosion of naira value, “foreign portfolio investors are pooling out as a result of uncertainties in crude oil and the foreign exchange market,” said Ayodeji Ebo, head of research at Afrinvest West Africa Ltd. “The market sentiment is still very low.”

As leaders of the various oil producing nations brainstorm at individual levels on how to dance round the undesirable scenario, figures emanating from the various economic research groups, rather than allay the fears of economic planners have continued to give the impression that there is no end in sight yet on the tumbling oil price.

However, there is a consensus that the current slump is being fueled by the supply glut, which has continued to depress the product’s price.

For instance, Citigroup expects Russian production to grow steadily and sees it up by 100,000 barrels a day this year to about 11.1 million barrels a day. It expects Saudi Arabia to produce about 10.2 million barrels a day, after hitting a record high this spring. Citi analysts see Saudi production at just under the 10 million barrel a day level next year.

The Glut

Some market watchers, after a thorough analysis of the situation in the United States of America, feared that the fourth quarter of this year looks particularly bad because refining demand drops and driving season drops off … “if you get through the fourth quarter and you still have this oversupply, then maybe it’s the second quarter of next year when you have this drop off in demand again,” one analyst said.

A number of oil analysts expect the next big drop, and possible bottom in prices, to come when the US refining industry shuts down some capacity for maintenance between early September and early November. That industry has been processing about 17 million barrels a day, and refining maintenance would take one million to 1.5 million barrels off the run rate.

According to the International Monetary Fund (IMF), Global crude oil price slump will have severe impact on the Nigerian economy as well as other oil producing countries in the continent in 2015.

Therefore, given the weaker economic outlook for the continent, the fund revised downward Africa’s projected growth in 2015 to 4.5 per cent, from five per cent in 2014.

Nigeria is also the continent’s largest oil producer. So, when prices started to slide last year, so, did the forecasts for growth in 2015, down from more than seven per cent in October to less than five by early 2015.

The Pressure

It is going to put pressure on the government to go to the capital market to borrow money, thus domestic debt will rise, with higher interest rate in the market,”  a market observer said.

It would also put pressure on the foreign reserves as the government would have to draw down on the reserves while the naira would take a further beating.

Analysts, including Managing Director, Financial Derivatives, Bismarck Rewane, believes one of the likely responses to the realities in the global oil market is for Nigeria to devalue its currencies.

The ECA, into which the country saves the difference between the market price of oil and the budget benchmark to provide a cushion when prices fall or extra cash is needed for spending on infrastructure, was rapidly depleted in the fourth quarter of last year as oil revenues plunged.

Nigeria produces around 1.8 million barrels a day and its oil is prized for its low sulphur content. However, most of America’s extra production is also low sulphur.

The problems of falling oil prices are most acute for the government which relies on petroleum products for 75 per cent of its revenue.

Ratings agencies predict a budget deficit as President Muhammadu Buhari struggles to fund his battle against Boko Haram insurgents in the country’s northeast.

The steep decline in oil prices had in March forced the National Assembly to settle for $53 per barrel as the oil benchmark price for 2015 budget, down from $65 proposed by the Executive, which had to adjust it twice, from $78 to $73, and later to $65.

Oil prices have recently shown signs of stabilising, with Brent trading at $68 per barrel in May, after losing about 60 per cent of its value between June 2014 and January this year. It reached a peak of $115 per barrel in June last year.

The Global Chief Economist, Renaissance Capital, Mr. Charles Robertson, said, “The lower oil price is going to be painful for the budget. It means less money is available for much-needed investment in infrastructure.”

It is going to put pressure on the government to go to the capital market to borrow money, thus domestic debt will rise, with higher interest rate in the market, a market analyst said.

It would also put pressure on the foreign reserves as the government would have to draw down on the reserves.

“The pressure will be to devalue the currency,” he said.

The ECA, into which the country saves the difference between the market price of oil and the budget benchmark to provide a cushion when prices fall or extra cash is needed for spending on infrastructure, was rapidly depleted in the fourth quarter of last year as oil revenues plunged.

Today, the question is when will the glut in the oil market simmer? Already, the Organisation of Petroleum Exporting Countries has pumped above its 30 million-barrel-a-day quota for more than a year, according to data compiled by Bloomberg.

Saudi Arabia’s oil exports rebounded in June from a five- month low as the largest OPEC producer boosted output, according to data on the website of the Joint Organizations Data Initiative, or JODI. Output rose to 10.564 million barrels daily from 10.3 million. Saudi Arabia told OPEC its June production was a record, exceeding a previous all-time high set in 1980.

It’s clear that the major producers, the Saudis, Russians, US and others, are battling for market share.

Angola plans to ship 1.83 million barrels a day in October, the most since November 2011, according to a preliminary loading program obtained by Bloomberg. That compares with 1.77 million barrels in September.

Iraq must increase oil output to meet the needs of its growing population and provide services, Prime Minister Haidar Al-Abadi said on his website. The nation’s production climbed to a record 4.18 million barrels a day in July, according to the International Energy Agency.

 

– This Day

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