With its 2020 revenue projections all but in tatters, analysts fear that low oil price may have rendered the Nigerian economy comatose; BENJAMIN UMUTEME reports.
Nobody expected it would come in the manner it did, but it came upon the world a time when people were busy planning for everything but how to stop a pandemic of such proportion.
The novel coronavirus had started in China in November and by the end of the year, it took a different turn as hundreds of thousands of people had contracted the disease. And by February, it had spread into Europe and American wrecking havoc as infections and deaths increased by the day.
Presently, there are 1,445,992 coronavirus cases with 83,090 deaths and 308,684 recoveries. Coming home, the effect of the pandemic has been mild with 254 cases, six deaths and 44 recoveries.
The colossal damage it has left in its wake with its attendant economic effect has yet to be quantified. The impact is the slowdown in the global economy, especially as many countries are on lockdown with production of goods and services unable to take-off.
Stock market
In the first quarter of 2020, stock markets around the world suffered historic losses amid a massive sell-off tied to the coronavirus pandemic. The Dow Jones Industrial Average and London’s FTSE 100 saw their biggest quarterly drops since 1987, plunging 23 per cent and 25 per cent, respectively.
The S&P 500 lost 20 per cent during the quarter, its worst since 2008.
However, economists had warned the hit to the global economy is likely to be worse than the financial crisis, with forecasters for IHS Markit, for example, predicting growth will shrink 2.8 per cent this year, compared to a 1.7 per cent drop in 2009.
The Nigerian Stock Exchange (NSE) as part of a global stock market is not immune as it in February alone it lost N1.8 trillion; and the market continues to be bearish.
Aviation industry
In the aviation industry, the story is not much different as its umbrella body, the International Air Transport Association (IATA) in its assessment of the impact of the Covid-19 pandemic put the global aviation industry lose at $63 billion in revenue, just as it added that a broader impact could lead to losses of as much as $113 billion, depending on how the virus outbreak develops.
“It is unclear how the virus will develop, but whether we see the impact contained to a few markets and a $63 billion revenue loss, or a broader impact leading to a $113 billion loss of revenue, this is a crisis,” the secretary-general, Alexandre de Juniac, said.
With all local airlines shutting operations and international airlines unable to operate due to continued spread of coronavirus Nigeria’s aviation industry is likely to lose over N160.58 billion ($434 million) in revenue.
Even the federal government’s plan to generate about N2 trillion from the maritime industry is also being threatened by the outbreak of coronavirus (Covid-19).
More ominous is the fact that Nigeria and other oil-producing countries in Africa will lose up to $65 billion in revenues because of the impact of the pandemic on crude oil sales.
The Economic Commission for Africa (ECA) released this figure in a report on the ravaging coronavirus pandemic on the continent.
According to the ECA, Covid-19 could reduce Nigeria’s total exports of crude oil in 2020 by between $14 billion and $19 billion. Considering that a large chunk of its earning was from crude oil this is not cheering news.
Saudi-Russia price war and oil slump
On March 8, 2020, Saudi Arabia initiated a price war with Russia, triggering a major fall in the price of oil, with US oil prices falling by 34 per cent, crude oil falling by 26 per cent, and Brent oil falling by 24 per cent.
The price war was triggered by a breakup in dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil production cuts in the midst of the 2019-20 coronavirus pandemic.
Oil prices had already fallen 30 per cent since the start of the year accessioned by a drop in demand. As it stands, the price war is one of the major causes of the currently ongoing global stock market crash.
Also, on March 8, this year, 2020, Saudi Arabia announced unexpected price discounts of $6 to $8 per barrel to customers in Europe, Asia, and the United States. The announcement triggered a free fall in oil prices and other consequences that day, with Brent crude falling by 30 per cent, the largest drop since the Gulf War.
The following day (March 9, 2020), stock markets worldwide reported major losses thanks in part to a combination of price war and fears over the coronavirus pandemic. Effects were felt outside of oil prices and stock markets as well; following the announcement, the Russian ruble fell 7% to a four-year low against the U.S. dollar.
As demand continued to fall dramatically, oil prices went down further, reaching a 17-year low on March 18, where Brent was priced at $24.72 a barrel and WTI at $20.48 a barrel.
Oil prices remained depressed for the rest of March. 2 April 2, US President Donald Trump said a reduction of 10-15 million barrels in production would be possible, citing negotiations between Russia and Saudi Arabia he brokered behind the scenes. The following day, Russian President Vladimir Putin ordered energy minister Alexander Novak to prepare an extraordinary OPEC meeting and stated that global production could be cut by 10 million barrels.
In response to Putin’s statement, oil prices jumped. Even with a 10 million bpd cut, the International Energy Agency estimated that global oil stockpiles will still increase by 15 million bpd. IEA’s director, Fatih Birol, stated that 50 million jobs related to oil refining and retail was at risk globally.
Selling at a discount
With an agreement in sight, Bonny Light (which Nigeria’s crude grade) will be selling them in April at a $3 per barrel discount to Dated Brent. Even at the steepest discount in decades, Nigeria may be unable to sell all its April cargoes, traders told Bloomberg this week, as oil demand plunges and other oil producers are also heavily discounting their crude.
According to Fitch Ratings, Nigeria’s breakeven oil price – the oil price required to balance the government’s budget, all else being equal – is $144 a barrel, the highest among major oil producers in the Middle East and Africa, including Saudi Arabia, Bahrain, Oman, Kuwait, Abu Dhabi, and Qatar.
The demand destruction and the low oil prices will hit many African oil producers, with Nigeria leading the pack with estimated revenue losses of $15.4 billion at $30 oil this year, estimates from the Atlantic Council’s Africa Center showed this week. Oil accounts for just 10 percent of Nigeria’s gross domestic product (GDP), but it is responsible for 57 per cent of government budget revenues.
Oil also accounts for 94 per cent of exports and a similar percent of foreign exchange earnings. Thus, government coffers will be hit harder than GDP, and as a result, public services will be constrained.
A report by investment management firm, Goldman Sachs says the sudden crash in crude oil prices is set to wipe $8.63 billion from the expected earnings accruable to the country in six months if the price war between Saudi Arabia and Russia continues.
Already, Nigeria has lost over $335.7 million after the crude oil price plunged in early March hovering between $30 and $36 per barrel. This is based on the 2020 budget benchmark of $57 per barrel.
Speaking on Channelstv’s breakfast programme Sunrise Daily on Wednesday, Group Managing Director, Nigeria National Petroleum Corporation (NNPC), Mele Kyari, disclosed that a combination of the covid-19 pandemic and oil price crash has left the country with 68 million barrel in losses.
