Nigeria faces toughest fiscal crisis as oil prices drop further

Nigeria is facing the toughest fiscal crisis in a decade based on its reliance on oil revenue as oil prices in the international market dropped below $30 per barrel on Tuesday.

The country is set to witness a decline as its income from oil and gas is projected to fall by between 50 per cent and 85 per cent in 2020, reaching the lowest levels in more than 17 years.

Oil briefly traded below its lowest price since 2003 as the coronavirus pandemic threatens to bring the global economy to a standstill, weakening demand just as supply explodes.

Brent oil crashed in New York fell as much as 2.8 per cent in the Asian morning, touching as low as $26.20 a barrel. Prices gained back some of their initial losses but remain more than 15 per cent weaker this week in the most volatile trading in history.

According to an oil and gas expert, Temiptope Busari, CFA Treasurer at a leading consumer Finance Organization in Lagos, Nigeria said Russia’s refusal to participate in oil production cuts recalls to mind that time in 2014 when OPEC collectively agreed to do same in a bid to regain market share from US Shale producers.

That decision resulted in the fall of oil prices to $20+ levels (similar to recent happenings) and must have cost millions of dollars in lost revenues. This time around, Coronavirus is an unexpected variable that has collapsed global demand and exacerbated the supply glut on the back of the price war between Saudi Arabia and Russia.

“Russia seems bent on defending its market share, even as Saudi Arabia refuses to back down and has, in fact, made the biggest price discounts in 30 years. To my mind, the question is how long can Russia continue this ‘cut off your nose to spite your face’ approach? It’s one thing to come for US shale producers but they might have to rethink this strategy as the costs increasingly outweigh perceived benefits.

“At some point, Russia will come back to the table for deliberations but with Coronavirus in the mix, the outcome of events remains unpredictable.”

One thing that seems certain is that oil prices will remain in the $30s in the near term and government budgets would be drained in smaller oil-exporting countries like Nigeria and Angola. It’s certainly looking like a rough couple of months ahead.

While the government and central banks around the world take unprecedented steps to shore up their economies from the fallout of the coronavirus, the meltdown in oil demand and concurrent supply free-for-all by the world’s biggest producers continue to pull crude prices ever lower.

The Financial market is finding little support in global efforts to stem the economic fallout. The U.S. Federal Reserve on Tuesday announced the restart of a financial crisis-era program in an effort to stem the economic impact from the virus.

While U.S. stocks surged from the biggest rout since 1987 on the plan, oil continued its slide as Saudi Arabia hinted its intention to produce a record 10 million barrels a day in April.

West Texas Intermediate for April delivery was 2% lower at $26.93 a barrel on the New York Mercantile Exchange as of 8:46 a.m. at Nigeria’s local time.