How Saudi’s Oil Price War May Push Nigeria’s Economy into Recession

Saudi Arabia’s launch of an aggressive oil price war targeting its biggest rival producers after Russia refused to join production cuts with OPEC, will hit the economy of a weaker oil-dependent producer like Nigeria particularly hard, as it has little scope to increase output and less ability to borrow to plug budget shortfalls.

The action also threatens to swamp the crude market with supplies just as the coronavirus outbreak hits demand.

Saudi Arabia, the world’s top oil exporter, plans to raise its crude oil production significantly above 10 million barrels per day (BPD) in April.

Experts say this will be a calamity for Nigeria whose economic mainstay is oil.

Already with the coronavirus outbreak, the Federal Government is considering to review the 2020 budget as oil revenue comes under severe pressure.

The 2020 Nigeria’s budget was benchmarked on an oil price assumption of $57/ bbl and oil production of 2.18mb/d.

The eventual price cuts that will follow the glut threaten to further weigh on international oil prices, with Brent already down from $70 a barrel in early January to near $45 a barrel. It fell 9 percent on Friday alone after the so-called OPEC+ deal unraveled.

Traders and analysts have warned an all-out price war could see oil prices fall to $30 a barrel or lower, bringing back memories of the last time Saudi Arabia opened the taps in 2014.

The Director-General of Lagos Chamber of Commerce and Industry, Muda Yussuf, told newsmen that the outbreak of the coronavirus a few weeks ago has profound implications for the Nigerian economy and poses a major threat to Nigeria’s macroeconomic fundamentals, the impact of which may be systemic and far-reaching.

He added that the looming price war contemplation by Saudi Arabia, the largest crude oil exporter, portends even more ominous signs for the Nigerian economy.

He said with the current scenario of tumbling oil price, a drastic reduction in the revenue of government becomes inevitable in the near time.

“This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy,” he added.

According to him, the slump in oil price and the associated adverse expectations will put fresh pressures on the reserves.

He added that the development will lead to weakening of investors’ confidence, enervation of speculative pressures on the currency, likely depreciation of the naira exchange rate, heightened inflationary pressures on the back of currency weakening, likely increase in production and operating costs for businesses and weakening of purchasing power with adverse implications for the welfare of the citizens.

He said global supply chain has been deeply disrupted as China, which is the second-largest economy in the world, is a major supplier of inputs for manufacturing companies around the world, Nigeria inclusive.

“Many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs. This has implications for capacity utilisation, employment generation and products’ supply to the domestic market. There is also an implication for inflation,” he added.

Managing Director of Danvic Petroleum International, Dr. Afe Mayowa, also reasoned that the price war between Saudi Arabia and Russia, is not a good omen for Nigeria, adding that it would have severe impact on the nation’s oil and gas sector and the economy in general.

Lukman Otunuga, FXTM research analyst, said recession will continue to affect the Nigerian economy for as long as crude oil remains the primary source of revenue.

He said: “Falling oil presents negative consequences for the economy, especially when considering how roughly 90 percent of export earnings and over 50 percent of government revenues are from crude exports.

“What is even more alarming is Nigeria’s 2020 budget which has set the benchmark for oil at $57. With Brent and Crude both depreciating over 15 percent since the start of 2020, it raises tough questions whether Nigeria will meet its oil revenue goal of N2.64 trillion.

“The woes do not end here. Foreign exchange reserves are poised to decline on lower oil which not only complicates the Central Bank of Nigeria’s (CBN) efforts to defend the naira but raises the risk of inflation running rampant.

“The toxic combination of lower government revenues, rising consumer prices and weakening local currency is more than enough to threaten Nigeria’s fragile economic recovery.”

Last week, Minister of Finance, Zainab Ahmed, expressed concern over the dwindling revenue from crude oil sales, saying, “We are concerned in the current drop in oil price because it is now below our budget”.

The Minister of State for Petroleum, Timipre Sylva, had also expressed strong concern about the situation which has left the country’s projection for 2020 with a shortfall that may be too massive to recover in very “short notice”.

He said in Lagos that as coronavirus bites harder, Nigeria’s oil fortunes drop drastically from a projected $57 per barrel to $55 with devastating implications on the country’s ability to sufficiently fund the budget for 2020.

He added that the country was extremely worried about the dip which could fall as low as $48 as more companies shut down businesses in the wake of the disease.

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