Wednesday, July 08, 2020 / 10:47 AM / by FDC
Ltd / Header Image Credit: Unian
The recent volatility in oil prices due to the coronavirus pandemic and the oil price war between Russia and Saudi Arabia, has caused a drastic drop in Nigeria's revenue profile. Nigeria's oil revenue dropped by N425.52billion in Q1'2020 to N940.91billion and may drop further in the coming quarters. This is a twin challenge for Nigeria as it has negatively impacted both the demand and supply sides of the economy. Demand for Nigeria's oil has declined due to the global economic contraction. As at May 30, Nigeria had over 50 million barrels of oil waiting at the port for potential buyers.
Meanwhile, oil prices have started to recover owing to improved compliance to OPEC's output cut of almost 10 million barrels per day and the global easing of lockdown restrictions. Brent crude price rose 40% in May which is its highest level since 1999 while WTI crude price was up by about 80%, its highest increase since 1983. Brent crude was up by more than 5%, to $43.20 per barrel as at June 23rd. This is the highest level since March this year.
In a bid to further aid recovery in the global oil market, the OPEC+ agreed on June 6th to further extend its oil production cut of 9.7 million barrels per day till the end of July. Further extension in the coming months is dependent on the compliance to quotas of some countries including Nigeria and Iraq. This indicates that the future of the global oil market is still bleak in the medium term although global oil consumption and price may have been recovering as lockdowns ease in North America and Europe. Given the global situation as it relates to oil, Nigeria can expect to navigate much lower costs per barrel and revenue projections for the foreseeable future. This will trigger an increased reliance on domestic and external borrowing and will have negative impacts for the financial sector.
Impact on the Nigerian Economy
Before the recent economic crisis and pandemic, Nigeria was already reeling from the 2016/17 recession: struggling to boost its growth, rising inflation, depleting external reserves and a huge external debt. The IMF has predicted a 3.4% contraction in the country's GDP in 2020 due to COVID-19. If oil prices remain soft Nigeria's recovery may be stalled due to its vulnerability to price shocks.