As the Coronavirus (Covid-19) pandemic triggered movement restrictions around the globe with economic activities slowing down, the demand for oil has witnessed one of it’s worst decline in decades. According to oil traders monitoring the African market, Nigeria bonny light crude traded as low as $12 – $13 per barrel this week. On Friday brent closed at $28.08 according to the figures on Investing.com. This disparity in prices stress the deep divide between the actual market price of oil and the headline future prices such as brent.
Europe who is a regular buyer of Africa’s oil has been badly hit by Covid-19 pandemic, which triggered a lock-down in several countries. Despite the slump in oil prices, the demand for oil remains very bearish. This situation particularly presents a problem for Nigeria due to its low storage capacity, hence the need to sell its oil mounts.
According to the director on the oil markets and downstream team at IHS Markit, Spencer Welch – “That seems to be the first real point of a bust, with no onshore storage, so it has to go to ships”. Nigeria storage capacity could be exhausted if ships are not available to load the oil.
Half of government revenue comes from oil and about 90% of it’s foreign exchange is earned from oil as well. Nigeria initially bench marked it’s 2020 budget at oil price of $57 per barrel which was later revised down to $30 per barrel as the economic effect of Covid-19 became apparent and still oil is trading below this revised benchmark. The downward revision of 2020 budget embarked upon by Nigeria last month was due to the country’s over dependence on oil for it’s revenue. According to Fitch rating Agency, the break-even price of oil for Nigeria is $133 per barrel.
According to media reports in March, The Group Managing Director of NNPC, Mr. Mele Kyari said that Nigeria will be “out of business” if the slump in oil price persists, at the time of his comments oil futures brent, was trading around $22 per barrel.
Nigeria seems to be in a conundrum, on one hand is a depreciating price for her oil while on the other hand is lack of demand for the same oil even at record low prices. As the Federal Government of Nigeria struggles with this problem, it might be worthwhile to finally revisit the issue of diversification of the country’s revenue base.
Written by:
Ifunanya Ikueze
Analyst/Writer @Investogist
Disclaimer: Any person accessing this information and considering potential investment opportunities featured here should make their own commercial assessment of an investment opportunity after seeking the advice of an appropriately authorized or regulated financial advisor. This information should not be construed as advice or a personal recommendation to any prospective investor
