Economy in pains as oil prices crash further

The current cash crunch and liquidity flow that has hit the country which has made many states unable to pay salaries, may yet worsen as international price of crude oil crashed even lower at the weekend.
The development threatens the nation’s economy, the 2015 budget and fiscal plan, given that resources from crude oil export forms about 85 per cent of the country’s income.
The international price of crude hit a six-year low below USD40 per barrel with West Texas Intermediate crude oil futures as low as USD39.89, while Brent crude which is similar to Nigerian sweet crude declined further to USD45.10 from previous week’s level of USD48.87 per barrel.
It is envisaged that prices will crash even further once Iran begins to enyoy its international pardon by pumping more oil into the already saturated market.
This will spell more doom for Nigeria, which is producing less than its projected 2 million barrels daily.
The steep decline in oil prices had in March this year forced the National Assembly to settle for USD53 per barrel as the oil benchmark price for 2015 budget, down from USD65 earlier proposed by the Federal Executive Council under ex-president Goodluck Jonathan.
The government had earlier in the year effected downward review of the budget benchmark twice in response to sliding oil price from USD78 to USD73 and later to USD65. It even said it had planned for possible price fall scenarios of up to $50/barrel.
With this development, economists are expecting further downwards adjustments in the budgetary benchmark, revenue projections and ultimately expenditure provisions. Also, they expect further pressure on the value of Naira as the development has wiped off any accretion to the country’s Excess Crude Account.
The oil revenue situation appears more compounded as Nigeria’s ability to produce, and availability of buyers have been on the negative since this year. According to OPEC, the Nigerian National Petroleum Corporation (NNPC) cut its July official selling price for Bonny light and Qua Ibo to 10-year lows relative to North Sea Brent, as an overhang of 15mb July cargoes were unsold.

Read also: Excess Crude Account at risk as oil falls to $53

The OPEC added that loading delays also hurt certain Nigerian grades as refiners looked for more reliable alternatives.
Moreover, West African crudes were undermined by excess supply and relatively high freight rates for their cargoes making cheap North Sea and Mediterranean grades more attractive to some European buyers.
OPEC is unwilling to cut back production as it would have done in the past to shore up prices because of shale oil, thus resulting to the current glut in the market and continuous price falls.
The slide toward USD40 per barrel gained momentum earlier last week after the US Energy Information Administration reported a larger-than-expected build in crude inventories previous week.
This added to signs that the oil market remains oversupplied, with unequal demand, as the 12-member OPEC continues to pump at an unrelenting pace. The group’s latest monthly report showed that its output surged to a three-year high in July, boosted by Saudi Arabia, Iraq, Angola, and Iran. More Iranian oil is expected on the market with lifting of economic sanctions.
Oil is now headed for its longest weekly losing streak since 1986, according to Bloomberg. Oil is in a bear market, and prices are down nearly 35% from recent highs.

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