As the global oil benchmark Brent crude fell by $2.31 to $40.69 per barrel, its lowest level in almost seven years, Nigeria and other countries that rely on oil revenues will take a further beating amid supply glut in the market. Experts warned that Brent crude, against which most of the world’s oil including Nigeria’s is priced, has fallen by more than 60 per cent in the past 18 months, putting pressure on oil-exporting countries.
The glut in the oil market, which is said to be oversupplied to the tune of 1.5 million to two million barrels per day (bpd), is expected to be exacerbated by the full return of Iran to the market after the expected lifting of Western sanctions. This crisis in the global oil market is a threat to Nigeria’s projected production target for 2016. Industry experts say that other threats include the maturity of some fields and the global economic outlook.
Nigeria, like other oil producing countries, 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 call obligations of about $615.8 million monthly.
Leo Ukpong, Professor of Financial Economics, University of Uyo, Akwa Ibom State, said that “further decline in oil prices spell more financial troubles for Nigeria for two reasons. Since our budget is largely dependent on revenue from oil, the decline in pricing 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 implications for our economic productivity.”
Dolapo Oni, Head of Energy Research, Ecobank Capital, noted that the country had been struggling to sell its crude oil in the international market, and further drop in price had added to challenges. Oni explained that , “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 and 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.” Noting that oil price could fall below $40 per barrel before the end of the year, because the “market is over-supplied and the OPEC decision to allow output at current level will keep the market over-supplied into 2016.”
At its recent policy meeting in Vienna, The Organization of Petroleum Exporting Countries (OPEC), failed to address the glut in the market as it decided to retain production at the current levels, further swelling a glut that has lowered prices. OPEC, whose members pump out more than one third of world oil, is currently producing above its official target of 30 million bpd. Actual daily production is estimated at 31.5 million bpd.