Nigeria’s Brent crude falls below production cost

Nigeria is swimming in trouble waters as its Brent crude prices plunged to negative territory as traders sold off their positions to avoid storage costs associated with physical delivery amidst declining oil demand.

Oil prices have continued its downward trend, with Brent crude falling below its average unit cost of production of US$23. To make matters worse, there are reports that Nigeria has cargoes of unsold oil with no buyers in sight, forcing the country to sell at a discount.

It was gathered that Nigeria’s Qua Iboe and Bonny light, two of its finest crude oil grades were trading at US$12/bbl as at the end of last week. This pales when compared with the revised budget benchmark price of US$30/bbl from US$57/bbl prior to the pandemic.

The situation is further worsened by the fact that the newly agreed OPEC production cuts would see Nigeria’s oil production quota slump to 1.4mb/d from 1.7mb/d excluding condensates.

The nation appears to be facing its worst fiscal position in many years this quarter. Prior to the steep decline in oil prices, FAAC revenues were already declining.

According to experts, this is likely to aggravate this quarter as the country grapples with the burden of unsold cargoes, declining prices, and a halt in economic activities due to the coronavirus outbreak with its negative impact on tax revenue collection.

A steep decline in FAAC revenue as anticipated this quarter may lead to a return to the recession-era when most states could not pay salaries.

At a critical time like this, when it appears some oil grades now costs less than water, policymakers need to go back to the drawing board to recalibrate their strategy in avoiding an unprecedented crisis.