Are Oil Prices Heading For The Rocks?

Proshare

Friday, November 30, 2018 / 10:26 AM / FDC

 

In a shocking twist of events, Brent oil price recorded its sharpest monthly decline in over five years. The black gold lost 21% in November alone to close the month at $59.80pb. This adds to the woes of the OPEC Russia alliance and will be a major consideration at its next meeting scheduled to take place on December 6. 

The downward spiral in prices can be attributed to a combination of factors - higher expectations of a supply glut and lower than anticipated global growth in 2019. The IMF cut its global growth forecast by 20bps to 3.7% due to the momentum in the ongoing trade wars and increasing protectionism among leading economies.  

This development further emphasizes the need to cut global supply. OPEC alone would be looking at an output cut of at least one million bpd to alter the current trajectory of oil prices. The impact of this move would also be dependent on the continuous agreement with the other oil-producing giant, Russia.

 

Is there light at the end of the tunnel?

Experts are optimistic that the decline recorded so far is aberrational and is more of a kneejerk market reaction to the current global trends. Even with the downward revision in global growth, the increased momentum in the industrial efforts of key emerging economies will sustain current demand levels. 

The rise in the number of Chinese refineries should see oil demand strengthen gradually from 2019. This alludes to the fact that China is where demand growth lies. This may see China, the world’s biggest oil buyer, progressively position itself as a price maker.  

Like China, India is also intensifying its industrialization drive, a positive for oil producing states like Nigeria. China and India are Nigeria’s key trading partners accounting for 9.74% and 13.21% of Nigeria’s total trade values.1 However, these developments are to the advantage of oil consuming economies. 

 

Are there potent risks to current forecasts?

Considerable downsides to oil price outlook are the possible suspension of the Iranian sanctions and a breakdown in the OPEC-Russia alliance due to goal incongruence. This has become potent given that Iran has made significant strides overturning its current oil embargo. Although highly unlikely, the possible turnaround in the fortunes of Venezuela’s oil production could undermine the positive outlook of most analysts.  

 

Impact on Nigeria’s economic indicators

Although Nigeria remains oil production sensitive relative to price, an oil price below the MTEF oil benchmark of $60pb distorts the fundamental pillars of the budget plan. In addition, a possible cut in Nigeria’s oil quota by 200,000bpd could deal a significant blow to Nigeria’s fiscal consolidation efforts. 

This will force the government to revise its spending, possibly pulling the economy into a technical recession. This will weigh on key indicators such as the economic growth forecast of 3.01% in 2019, external reserves will move south of $40bn and exchange rate will depreciate by at least 5.4% to N380/$. This is also expected to widen Nigeria’s budget deficit, exerting more pressure on Nigeria’s current debt profile and debt servicing obligations. 

Like most oil stakeholders, Nigeria will be very interested in the outcome of the December 6 OPEC meeting in Vienna. This will be critical to policy managers as they position in preparation of major external imbalances that might require stern adjustment or austerity measures. 

 

Proshare Nigeria Pvt. Ltd.


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