Nigeria’s Public Finance Works Well When Oil Trades at $60 – Coronation
Coronation Merchant Bank has said that Nigeria’s public finance works well only when prices of oil are above $50 per barrel.
In its macroeconomic update, Coronation said that better still when oil prices rise above $60 a barrel. For the economy to grow strongly amidst the scare of recession, analysts said Nigeria needs both firm oil prices and high levels of production, and this combination may remain elusive for a while.
The firm explained that though prices are trending in that direction, the prospect of the Democratic Party winning November’s presidential election puts a question mark over the trend next year.
Also, the Organisation of the Petroleum Exporting Countries (OPEC) insists on Nigeria cutting its production as prices rise.
It would be recalled that the Oil cartel had mandated members countries to cut supply to reduce a glut in the oil market, and then force the price to rise amidst rising cases of coronavirus that necessitated global economic lockdown.
In between, oil prices dropped until it reached the contango level where prices trended negative, which means suppliers would have to pay buyers for storage. Last week, analysts that tracked oil prices said prices of Brent crude increased by 1.5% to $45.05 per barrel litre.
The average price, year to date, is $42.60 per barrel, which was 33% lower than the average of $64.20 per barrel in 2019.
Coronation said in the note that the increase in oil prices was caused by a mix of factors including a reduction in oil supply due to hurricane Laura which caused US oil producers to shut down some of their facilities.
Also, an upward demand for crude oil as more COVID-19 restrictions are lifted around the world. “We see oil prices trending gently upward from here”, analysts at Coronation Merchant Bank stated.
Explaining its position, Coronation said the Presidency of Donald Trump has seen US oil production rise from 8.8 million barrels per day (mbpd) in January 2017 to a peak of 13.1mpdd in March 2020 before slumping to 10.8mbpd in August.
“If Joe Biden becomes President of the United States in January 2021 America’s policy towards oil is likely to change”, the Merchant Bank stated.
Analysts explained that Mr. Biden wishes to become a green president, and intends to re-sign America to the Paris Climate Agreement and to put her on track to be carbon emission net-zero by 2050.
Coronation reckoned that none of these policies would have an immediate impact on oil prices, Mr. Biden also intends to sign a nuclear deal with Iran, which could enable the country to vastly increase its oil exports.
The firm recalled that under US sanctions, Iranian oil production has fallen from an average of 3.8 mbpd in 2017 to 2mbpd so far in 2020. Analysts said a change of 1.8mbpd is significant in the scheme of global production and supply which was roughly 100mbpd at the beginning of 2020.
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“A Biden presidency could bring about downward pressure on oil prices in 2021”, Coronation said in the report. In March, analysts recalled that OPEC and allies or the OPEC+ wanted to crash oil prices in order to drive out the business part of US shale production.
However, by mid-April, OPEC+ agreed to production cuts in order to stop oil prices from becoming too low. Nigeria, among other OPEC members, were expected to comply with the plan supply cut. Meanwhile, at the end of July, Coronation revealed that Nigeria’s quota was set at 1.4mbpd, compare with production that had peaked at 1.9mbpd.
In other words, analysts said Nigerian is being asked to forgo up to 26% of its production, significant for an economy in which oil supplies 90% of its exports and around 60% of government revenues.
Coronation said this brings a fresh perspective to recent gains in oil prices. Although, Brent are sharply up from the low level of $19.33 per barrel in April. Since June when Brent closed at $41.15 per barrel, the rate of climb has been low, reaching $45.05 per barrel at the end of last week.
“We would not argue with a forecast that puts oil trading at around $55 per barrel by the middle of fourth quarter 2020.
“In the past, we have seen how this price level positively affect international investors’ appetite for Nigerian assets, the Eurobond and the Open Market Operations (OMO) bills of the Central Bank of Nigeria and naira-denominated bills and bonds issued by Federal Government as well as by the private sector”, Coronation detailed.
For the economy to grow strongly amidst the scare of recession, Coronation said that Nigerian needs both firm oil prices and high levels of production, and this combination may remain elusive for a while.
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Nigeria’s Public Finance Works Well When Oil Trades at $60 – Coronation
