By AYOOLA OLAOLUWA
The continuing volatility in the price of crude oil in the international market is threatening the implementation of the 2019 budget.
The international oil benchmark, Brent, with which Nigeria’s premium Bonny Light is priced, had increased by more than 20% in the first half of 2018, before hitting a four-year high of $86.07 a barrel in early October of the same year.
However, oil prices suffered their worst monthly decline in a decade in December 2018 on fears that overproduction will lead to a surplus of supply next year.
While the US crude oil, West Texas Intermediate (WTI), dropped to a low of $42.84, its weakest since September 2017, the North Sea Brent dropped to $52.20, representing a 14-month low.
The downward thread recently reversed, with Brent closing at $61.02 at the end of trading on Thursday, January 10, 2019, just 0.02 cents above the oil benchmark for the 2019 budget presented to the National Assembly by President Muhammadu Buhari in December 2018.
Due to the crash and constant shut-ins, Nigeria has lost several millions of dollars of expected income.
Several reasons are responsible for the free-fall in the prices of oil. A major trigger is the deepening sense of global economic gloom as well as fears of oversupply in the oil market itself, caused by Saudi Arabia and Crown Prince Mohammad bin Salman’s alliance with US president Donald Trump.
Economists who spoke on the development maintained that there will be huge consequences for the global economy, especially oil-producing countries like Nigeria, predicting that the nation will struggle to fund the 2019 budget based on the $60 benchmark.
According to them, the nation had lost billions of naira in projected income from November 2018 till date from the drop in crude oil proceeds.
“As you know, the Nigerian National Petroleum Corporation (NNPC), on behalf of the Federal Government trades in the ‘futures’market where products are bought and sold two months ahead.
“As at today, Thursday, January 10, we are selling crude for March 10, 2019. How it works is that while our trade partners buy now, we are obliged to deliver exactly in two months’ time, except there is a disruption, in which case a ‘force majeure’ is declared.
“Since crude oil sold below $60 between November and December 2018, the nation can’t meet its funding projections based on the 2019 budget presented to the National Assembly, unless it borrows.
“The shortfall is still being computed, but the country lost the average of $5 between November 2018 and January 2019. So, if you multiply $5 by the 2.3millions barrels per day output projected for 2019, it means the nation lost $11.5m daily during the period in focus.
“Multiply that by two months, you will see that the loss is massive, not to talk of disruptions due to attacks and shut-ins, as well as unsold cargoes”, said Dr. Abiodun Beckley, a lecturer at the Lagos State University (LASU).
Also, an energy expert, Mr. Bank-Anthony Okoroafor, said the projected 2.3 million barrel of crude oil production per day in the 2019 budget is not realistic, insisting that the projection did not follow the uncertainties in the global oil market.
“Production output of 2.3 mbpd projection for 2019 may not be realistic owing to OPEC’s plan to cut production in order to shore up prices and growing crude inventory and excess supply versus demand.
“The benchmark price of 60 dollar used for the budget is not smart based on all the uncertainties and volatility surrounding the price of oil and surplus production,’’ he said.
According to him, the reality today is 59 dollar per barrel.He added that the global crude oil price would average 61 dollar a barrel in 2019 according to the short- term energy outlook by the U.S. Energy Information Administration (EIA).
“The estimate is lower than the EIA prediction just some month ago.The forecast dropped after oil prices dipped below 50 dollar a barrel in November, the average for the month was 65 dollars.
“They believed higher U.S. supplies will flood the market at the same time slowing global growth and will cut into demand. Saudi Arabia and Russia had also produced oil at record levels.
“On December 7, 2018, OPEC agreed to cut 1.2 million barrel per day from the October levels. Members will cut 800,000 barrels per day and allies will cut 400,000 bpd. Cuts will continue for six months.
“OPEC’s goal is to return prices to 70 dollars a barrel by early 2019. Will this happen based on the volatility of oil prices today? Only time will tell,”Okoroafor said.
He further stressed that government must consider all of the uncertainties in the global market noting that the volatility of oil prices would continue in 2019.
Other financial experts who spoke to BH argued that retention of $60 per barrel is too ambitious and poses a major risk to projections for the year.
Management consultant and Chief Executive Officer of BIC Consultancy Services, Dr. Boniface Chizea, argued that a situation whereby the budget benchmark is above the oil price is ill advised.
“What will likely happen is that the deficit included in the budget will be exceeded and there will be further recourse to increased borrowing.
A professor of capital market at the Nasarawa State University Keffi Prof. Uche Uwaleke, noted that the drop in oil prices is a cause for worry because of the nation’s over-reliance on oil.
He said if Nigeria’s economy was more diversified, it won’t be this pressured with oil volatility at the international market.
He warned the government to scale down its expenditure on both recurrent and capital projects.
An energy expert, Mr. Bala Zaka, also said that the federal government was too ambitious to hold on to the $60 per barrel benchmark for the 2018 budget.
“I expected the government to go below $50 because from the way things are going, the price of oil may not go beyond $70 per barrel in 2019. Consequently, the proposed $60 is not realistic.
“It is good for us to have surplus than deficit in the course of budgeting. This is mainly because deficit brings stress and unnecessary panic. But there is always no harm to have surplus.”
The Director General, Lagos Chambers of Commerce and Industry, Mr. Muda Yusuf, also sided with Chizea and Zaka, warning the government of imminent danger.
“Data from the Organisation of Petroleum Exporting Countries shows that oil prices trended down at $59.96p/bl on 29th November from $88p/bl one month ago.
“This is below 2019-2021 Medium-Term Expenditure Framework, MTEF, benchmark of $60p/bl. The declining global oil price poses a major risk to FG’s economic projections for 2019 fiscal year as well as impact adversely on its MTEF if the trend continues.”
The Head, Investor Relations at United Bank for Africa (UBA), Mr. Abiola Razaq. said the price decline would have no impact on the budget either from a funding perspective or perception perspective.
“It is already threatening the budget benchmark and overall revenue of the government for 2019. There’s also an implication for the naira because oil receipt remains the major source of our foreign currency supply as a nation meaning that a lower oil price has negative implications for the overall forex supply to the country. That also has implications for the ability of the central bank to meet FX demands,” he said.
He said this period presents a golden opportunity for the government to develop alternative revenue sources.
Other analysts however differ, saying that forecast for crude oil price for 2019 is still above $60.
The Managing Director/CEO, FSL Asset Management, Tola Odukoya, said: “I think the $60 benchmark is reasonable in view of the outlook in the crude oil market for next market. If you look at it, OPEC has agreed on production cut and part of the reasons for that production cut is the fact that prices have dropped to like $50 per barrel.
“The whole idea is to reduce production in order to bring prices to somewhere between $70 and $75 per barrel. If Nigeria is retaining $60 benchmark, I think it is in line with global expectation for prices.
“What we may need to be concerned about is the production level, (I think federal government is budgeting about 2.3 million barrels per day), which may not be realistic in view of the OPEC production cut that is already affecting Nigeria.
“However, in terms of the pricing, I think it is okay in line with outlook and expectation for oil prices this year”.
In his submission, the Managing Director/CEO of Prorisk Insurance Brokers Limited, Mr. OluwagbemigaOlawoyin, maintained that though the government must have decided to retain $60 per barrel after due consultation, the volatility in the crude oil market makes the decision risky.
“The International Monetary Fund (IMF) came up with an estimate that in 2019, Nigeria’s GDP will grow by about 2.2 percent and one of their parameters is that oil price will be relatively higher than what it is.
“Government is being optimistic and I think that I can join them on the side of their optimism. But if oil price continues to decline, then we will move back into recession. We will be back where we were in 2016.
“The only difference now will just be that the level of our external reserve is better than what it was in 2016.
“We are probably better positioned a bit to withstand it. But if the oil price remains as low as it is or get lower, the realization of the budget will be put in serious doubt.”
Call to the spokesman of NNPC, NduUghamadu, was not picked, while a text message to his phone was not returned.