OPEC+ failure to cut supply put Nigeria’s economy in danger

The Nigeria’s economy would bleed as the Organisation of the Petroleum Exporting Countries  failed to agree on supply cut due to Russia terms.

After the meeting, Brent crude price dropped sharply to 3-year low of $45.6 per barrel on Friday, as against $57 per barrel used to prepare fiscal year 2020 budget.

Analysts projected that prices could drop toward the $30 mark if OPEC+ does nothing more until its next official meeting on June 9-10 in Vienna.

The Nigerian economy which thrive on strong petrol dollar inflow is under grave danger as price of Brent dropped off due to failure of the Oil cartel to influence market prices.

Recall that OPEC+ met during the week with plans to cut oil production by an additional 1.5 million barrel per day to support prices due to the sharp fall in oil demand prompted by COVID-19.

With OPEC+ pulling plug on production cut, analysts estimated a reduce revenue generation for the government.

This is expected to impact ability to finance government’s budget for the fiscal period, though analysts recognise that government is still borrowing.

By the structure of the economy design, low receipts from oil exports would negatively impacted FG revenue.

This would extend to budget 2020 as recurrent expenditure accounts for chunk of the total sum projected to spend in 2020.

Analysts at Afrinvest remarked that with reports of unrestrained production starting on April 1, they expect Nigeria to be hit hard by the fall in oil prices.

OPEC failed to reach a deal as Russia opposed further cuts at the end of the meeting on Friday.

The immediate reaction to the outcome of the meeting was a moderation in Brent crude price to a 3-year low of $45.6 barrel per litre.

Meanwhile, on the domestic front, the external reserves fell 0.2% week on week to $36.2 billion.

The CBN spot rate closed the week at ₦307/$1.00, depreciating 5kobo week on week from ₦306.95/$1.00 in the prior week.

At the parallel market, naira traded flat at ₦360.0/$1.00. But at the Investors’ & Exporters’ (I&E) Window, the NAFEX rate depreciated ₦1.0 to settle at ₦366.25/ $1.00.

Activity level in I&E Window rose 14.4% to $3.0bn from $2.6bn recorded in the previous week.

The total value of open contracts of the naira at the FMDQ Securities Exchange (SE) FX Futures Contract Market advanced 2.2% ($235.2m) to $11.1 billion.

Also, the FEB 2021 instrument with contract price ₦367.00 received the highest subscription of $133.4 million.

This push total value to $968.8 million as foreign investors’ maintained preference for the 1-year OMO instrument.

On the other hand, the MAR 2020 instrument at contract price of ₦364.33 recorded sell-offs which reduced subscription by $4.8 million to $1.2 billion.

“We believe oil prices will remain pressured by waning demand as the virus continue to spread.

“We expect exchange rates to remain range-bound across different segments of the market in the meantime on the back of the apex bank’s intervention”, Afrinvest said.

OPEC+ failure to cut supply put Nigeria’s economy in danger