25 August 2015, Lagos – For the first time in six and a half years, the global oil benchmark Brent crude on Monday traded around $43 per barrel, $10 lower than Nigeria’s oil benchmark for this year’s budget.
The further slide in oil prices followed concerns about slowing Chinese demand, even as Iran and the United States look set to raise oil production.
Chinese stock markets on Monday suffered their biggest one-day decline since the global financial crisis, exacerbating worries over the outlook for global oil demand.
Brent, against which Nigeria’s oil is priced, on Monday fell by $2.16 to at $43.30 per barrel, near its weakest since March 2009, while the US benchmark West Texas Intermediate was trading around $38.74 per barrel.
The steep decline in oil prices had in March forced the National Assembly to settle for $53 per barrel as the benchmark oil 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.
An economist and Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, told our correspondent in a telephone interview that “at $43 a barrel, it means from $108 to $116 in Nigeria last year, our revenue is down by 65 per cent.”
He said, “Anybody whose income drops by 65 per cent has to think very hard. We have some hard times ahead of us.”
He warned that oil price could decline further, saying, “Your benchmark price is at $53; average price by this time last year was $100 and now you are at $43 and you are going to $30; you don’t need anybody to tell you that.”
BMI Research had last week said Brent would not recover until 2018, downgrading its average price forecasts to $56 and $55 per barrel for 2016 and 2017, respectively, compared to an average of $57 in 2015.
It said, “The return of Iranian oil to market, coupled with strong project pipelines in North America, the Middle East, West Africa and Kazakhstan, will see global supply growth outstrip the growth in global consumption for the next two years. A rising overhang of crude will maintain downward pressure on Brent.”
The Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, said, “The slide is a reminder to Nigeria that it is not enough to set the budget benchmark at $53, steps must be taken to ensure that revenue is protected by hedging the country’s oil output to some extent.
“Furthermore, it is indicative of the need for Nigeria to diversify away from dependence on oil. The current slide is likely to continue due to China’s strong influence on the energy markets and the current economic headwinds in China are creating bearish pressures on global markets for securities, currencies and commodities.”
In Oni’s views, the key implication from this for Nigeria is the continued decline in government’s revenue; pressure on the naira to continue losing value against major currencies, especially in the parallel markets; while oil production may come under pressure as some fields are no longer economic at this price.