OPEC+ failure to cut supply puts Nigeria’s economy in danger
Nigeria’s economy would bleed as the Organisation of the Petroleum Exporting Countries failed to agree on a supply cut due to Russia’s terms.
After the meeting, Brent crude price dropped sharply to a 3-year low of $45.6 per barrel on Friday, as against $57 per barrel used to prepare the 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 thrives on strong petrol dollar inflows, is in grave danger as the price of Brent has dropped due to the oil cartel’s failure to influence market prices.
Recall that OPEC+ met this week and plans to cut oil production by an additional 1.5 million barrels per day to support prices amid the sharp fall in oil demand prompted by COVID-19.
With OPEC+ pulling the plug on production cuts, analysts estimated a reduction in government revenue.
This is expected to affect the government’s ability to finance its budget for the fiscal period, though analysts recognise that the government is still borrowing. Given the structure of the economy, low oil export receipts would negatively impact FG revenue.
This would extend to budget 2020, as recurrent expenditure accounts for a significant share of the total amount projected to be spent 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 meeting’s outcome was a moderation in Brent crude prices to a 3-year low of $45.6 per barrel.
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 by 5 kobo week-on-week from ₦306.95/$1.00 in the prior week.
In the parallel market, the naira traded flat at ₦ 360.00/$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 pushed the total value to $968.8 million as foreign investors maintained their preference for the 1-year OMO instrument.
On the other hand, the MAR 2020 instrument, at a contract price of ₦364.33, recorded sell-offs, reducing the subscription from $4.8 million to $1.2 billion.
“We believe oil prices will remain pressured by waning demand as the virus continues 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.
