By Adedapo Adesanya
One of the greatest challenges currently facing the Nigerian economy is the dwindling prices of crude oil, which, using the Brent Crude standard, traded around the $54 dollar mark, $3 below the $57 per barrel benchmark set in the 2020 Budget.
Already, the country is faced with challenges regarding the contribution of the commodity to the country’s revenue and the new talks about the possibility of further production cap by Organisation of the Petroleum Exporting Countries (OPEC) on its members, including Nigeria, may further worsen the situation for Africa’s largest oil producer.
OPEC is considering this new measure as a result of the effect of the deadly coronavirus on prices of crude oil at the global market. It is believed that if the volume of crude oil production is reduced, prices will pick up again.
At the OPEC meeting with allies led by Russia in Vienna, Austria in December last year, Nigeria had pledged with other members of the cartel to contribute to the 500,000 barrels per day cut to bring down production to 1.7 million barrels till the end of March.
However, with the continuous impact of the coronavirus from China, one of Nigeria’s crude destinations, it is evident that there might be more aggressive oil output cuts of up to one million barrels than previously considered, after reviewing new data on Tuesday that showed coronavirus’ deepening impact on global oil demand, officials at the cartel said.
The impact would be felt by Nigeria if oil prices don’t go up to at least $65 despite cuts because this would mean that at the current 1.774 million barrels per day (bpd) cap, Nigeria may be forced to produce lower volume of oil, which could lead the country’s economy into another recession and shortage of foreign exchange, which is affecting the nation’s external reserves, currently below $38 billion.
In the 2020 budget, Nigeria put its average crude oil production at 2.18 million barrels per day at $57 per barrel.
Market analysts noted that OPEC and a 10-nation group of allies led by Russia had initially considered cutting 500,000 barrels a day, but a handful of scenarios up for discussions at the gathering on Tuesday foresee a need for much larger production cuts.
The virus, which originated in the Wuhan City of China last year, has already contributed to a sharp decrease in demand for crude, driving oil prices further down the budget cap of many countries, and with this OPEC officials are set to issue recommendations at the meeting scheduled for both Tuesday, February 4 and Wednesday, February 5. Following whatever recommendation is given, a final decision then would come after OPEC and its allies meet next week.
On Tuesday, OPEC’s research department presented two models with different estimates of how the virus may affect oil consumption. According to the models, the worst-case scenario estimated that if the virus lasts for six months, this could lead to about 400,000 barrels a day of demand, before a market rebound to pre-virus growth levels in the second half of the year.
However, if the cartel were to maintain its current output reductions throughout that period, there would be a surplus of 600,000 barrels a day in the first quarter and 1 million in the second, the analysis showed.
While a recommendation has not been reached, oil prices on Wednesday morning have resumed pointing north with the Brent Crude closer to $55 per barrel while and the US West Texas Intermediate (WTI), which fell below $50 was trading at $50.45 per barrel.
