New Wave of Coronavirus Infections Threatens Oil Price Recovery and Nigeria’s Economy

Crude oil prices fell last week after six weeks of steadily rising as the world’s major economies gradually reopen. The decline was due mainly to jitters over new cases of coronavirus infections in China.  This will put Nigeria’s strained economy under further pressure.

Brent futures, the gold-standard for crude oil, dipped 8.3% to $35 a barrel in New York last week, Bloomberg reports. Brent as of Monday morning is trading at $38.27 per barrel, 1.19% lower than it opened for the day.

A fresh coronavirus outbreak in China’s capital, Beijing and a record rise in coronavirus infections in the United States suggest that the worst might be far from over. For oil-dependent Nigeria, the novel coronavirus pandemic comes with an additional and critical economic consequence because of the close link between the demand for oil and the restrictions on movement that will come with attempts to curtail the spread of a new wave of coronavirus infection in the world’s major economies.

Although Brent contracts are around $10 dollars more than Nigeria’s budget benchmark of $28, the rise of new coronavirus infections would weaken the demand for oil, neutralising the boost oil prices have gotten from the agreement reached in early April to cut supply between OPEC and other oil producers led by Russia.

The collapse in oil price cut Nigeria’s oil revenue expectations for 2020 by at least 50%. The National budget has been revised more than once with the latest revision of N10.805 trillion passed on 11 June 2020.

OPEC+: Oil Production Capacities

No Excess Revenue to Save

According to the Vanguard Newspaper, citing a Finance Ministry source, at a current crude oil price of between $35-$40 per barrel, there is no excess revenue yet even though the prices are far above the revised budget benchmark.

The reason given is that Nigeria has current crude oil production costs of about $20-$22 pbl, which leaves a lower amount to be shared by the three tiers of government.

The Ministry of Finance source stated. “… a price above the benchmark is not an automatic excess revenue in the real sense of the word. We are having ups and downs. So don’t calculate it as if we have already had a steady revenue above the benchmark,” the source told Vanguard. The original benchmark for the 2020 budget was $57. Nigerian states are already in a fiscal crisis because virtually all of them depend on FAAC for 80% of their monthly income. Oil revenues that come in below the original benchmark set before the economic consequences of the new coronavirus will most certainly be shared to relieve the financial pressure on states rather than saved in the Excess Crude Account.

Zero Dollar Oil Unlikely to Reoccur

If the second case of coronavirus occurs, as is being suggested by China’s new cases, countries might be forced to again impose a mix of complete lockdowns and strict social-distancing measures which will slow economic activities and curtail the demand for oil.

Also, banks around the world including Nigeria would come under more severe stress depending on their exposure to the oil and gas industry (around 30% of Nigerian banks loan book are exposed to the oil industry).

While the outlook is still sketchy, analysts are optimistic that a repeat of oil contract slipping below zero as seen in April, 2020 is unlikely. Markets have come to understand that the major economies will curb the coronavirus infection through social distancing regimes for various sectors of the economy rather than complete lockdown.  But the uncertainty in the market is building up.

Investors across Asia, Europe and US sold-off stocks to hold gold causing the haven to rise 0.2% to $1,732.2 an ounce in early trade on Monday. Nigeria’s coronavirus caseload crossed 16,000 on Sunday.