The price of crude oil on Monday crashed to its lowest level since 2016 leaving Nigeria’s 2020 Budget with oil benchmarked at $57 per barrels, in grave danger.
Oil traded in Asia at $31 per barrel, following a price war by biggest oil exporters Saudi Arabia and Russia. The price war followed a disagreement between Organisation of Petroleum Exporting Countries (OPEC) led by Saudi Arabia and its partners led by Russia (OPEC+) over cut on supply due the coronavirus pandemic.
The outbreak of the virus especially in China has led to drastic drop in the demand for crude oil. This has led to glut in supply with several oil exporting countries looking for buyers for cargoes.
The OPEC+ meeting last weekend failed to agree on how to tackle the glut with Saudi declaring a price war on the market. The Kingdom was reported to have contacted buyers offering its cargoes at lower prices.
Oil cartel OPEC and its ally Russia had previously worked together on production curbs. The benchmark Brent oil futures plunged to a low of $31.02 a barrel on Monday, in volatile energy markets.
Oil prices have tumbled since Friday, when OPEC’s 14 members led by Saudi Arabia met with its allies Russia and other non-OPEC members.
They met to discuss how to respond to falling demand caused by the growing spread of the coronavirus.
But the two sides failed to agree on measures to cut production by as much as 1.5 million barrels a day.
The new price is however not good for Nigeria as the last time oil traded at that price range in 2016, the economy went into recession in August of that year.
The 2020 Budget was benchmarked at $57 per barrels at production volume of 2.18 barrels per day. Revenue from oil was expected to contribute N2.18 trillion of the N8.155 trillion total revenue to fund the budget.
The Central Bank of Nigeria (CBN) had last November warned that the oil price benchmark for the budget was unsustainable and should be revised downwards.
CBN governor, Mr. Godwin Emefiele who spoke to journalists after the bank’s Monetary Policy Committee (MPC) meeting in Abuja said uncertainty in the oil market does not favour the $57 oil benchmark.
He said then: “On crude oil price, the lull in the market suggests that prices would remain relatively weak into the foreseeable future. The committee resolved that the Federal Government should reconsider its 2020 Budget oil price benchmark of $57 per barrel, to build fiscal buffers”.
As at the time of Mr. Emefiele’s warning Brent Crude was selling at $62.87 per barrels.
He opined that the buffers would put the Gross Domestic Product (GDP) on good standing which would result in viable manufacturing and agricultural sector.
Then the Budget was still in the making and at the National assembly but his warnings went unheeded.
Faced with realities, the Minister of Finance, Mrs. Zainab Ahmed has admitted that the government was worried about the low price oil.
Speaking to journalists after the weekly Federal Executive Council meeting last Wednesday, she said: “We are concerned over the dwindling revenue from crude oil price because it is now below our budget”.
But for Nigeria the worse may yet to come as international oil traders and analysts are predicting lower prices as Saudi seeks to damage Russia.
The BBC is reporting that analysts are saying the price could fall as low as $20 per barrel as OPEC countries seek to produce more as they battle for market share.
The BBC reported that with global oil production now far outpacing demand, oil analyst Martjin Rats of Morgan Stanley said OPEC members are now expected to pump more oil to capture market share.
“Given OPEC countries now have very little incentive to restrain production, oil markets look sharply oversupplied,” Mr Rats said in a research note.