Tuesday, 8 December 2015

More trouble for Nigeria's oily economy as Brent Oil falls to $40 ...its lowest in 7 years

As the global oil benchmark Brent crude on Monday fell to its lowest level in almost seven years, Nigeria and other countries that rely on oil revenues will take further beating amid supply glut in the market, experts have said.

Brent, against which Nigeria’s oil is priced, fell on Monday by $2.31 to $40.69 per barrel, its weakest since February 2009, while the US benchmark West Texas Intermediate was trading around $37 per barrel.

The further slide in oil prices came on the back of the decision by the Organisation of Petroleum Exporting Countries to retain production at the current level and a stronger dollar, which made it more expensive to hold crude positions.

OPEC had on Friday failed to agree to lower production in an attempt to prop up prices that have dropped more than 60 per cent since June 2014.

Nigeria, like other oil producing companies, has seen its finances badly hit by the decline in oil prices, with oil trading below the country’s budget benchmark price in recent months.

According to the Nigerian National Petroleum Corporation, the dwindling oil price has negatively affected its dollar contribution to the Federation Account and its ability to meet joint venture cash calls obligations of about $615.8m monthly.

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 the 2015 budget, down from $65 proposed by the Executive, which had to adjust it twice, from $78 to $73, and later to $65.
A professor of financial economics at the University of Uyo, Akwa Ibom State, Leo Ukpong said, “The further decline in oil price spells more financial trouble for Nigeria for two reasons. Since our budget is largely dependent on revenue from oil, the decline in the price is a very big blow on what we plan to spend. That means we have to scale down projected spending.
“The second is that our exchange rate will also suffer. The naira will depreciate further and that will make it more expensive for manufacturing firms to import raw materials, with negative implication for our economic productivity.”
The Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, who noted that the country had been struggling to sell its crude oil in the international market, said the further drop in price had added to the challenge.
Oni explained, “It means lower revenue for Nigeria, and there are some fields that will no longer be profitable to operate.
“A government that wants to fund infrastructure but is facing lower revenue will have to borrow more, which will also affect future revenue, because servicing the debts will increase as the debts increase.”
He said the oil price could fall below $40 per barrel before the end of the year, because the “market is still over-supplied and the OPEC decision to allow output at current level will keep the market over-supplied into 2016.”
Ahead of the OPEC meeting, the Portfolio Manager, LO Funds, Pascal Menges had, in an emailed statement, said, “If Saudi Arabia doesn’t cut production, it and other OPEC members, will bleed money and face a massive fiscal deficit.”

A stronger dollar and the aftershock of Friday’s OPEC meeting are weighing on the oil market, an oil analyst at brokerage PVM Oil Associates in London, Tamas Varga, told Reuters.

Analysts at Barclays said the lack of an OPEC production target in its written announcement was a sign of discord.

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