Nigeria: Uncertainty As Coronavirus Pushes Oil Prices Below Nigeria's Budget Benchmark

Images combined from a 3D medical animation, depicting the shape of coronavirus as well as the cross-sectional view. Image shows the major elements including the Spike S protein, HE protein, viral envelope, and helical RNA.
4 February 2020

The outbreak of coronavirus in China has caused uncertainty among concerned operators in the Nigerian economy as oil prices continue to slide downward below the nation's budget benchmark.

PREMIUM TIMES' check at 11:40 a.m. on Tuesday morning showed Brent crude, the main international price, stood at $54.82 per barrel, up from about $54.45 on Monday.

Earlier in January, the face-off between the United States and Iran had forced prices above $70/barrel. The crisis followed diplomatic rows between both countries after U.S. airstrikes killed a top Iranian military commander, Qassem Soleimani.

However, oil prices slid into bear-market territory again on Tuesday, raising global investors' concern that China's coronavirus will hurt the global economy. It is expected that the ripple effect of the virus will reduce demand for gasoline, diesel and jet fuel.

Reports from Beijing showed that there are prospects of canceled flights, closed international borders and uncertainties over operations of factories. This has created disruption in financial markets, sparking swings in stocks, bonds and commodities around the world.

China is the world's biggest oil importer.

On Tuesday, a CNBC report claimed that the Organisation of Petroleum Exporting Countries and its allies are considering cutting their oil output by a further 500,000 barrels per day (bpd) due to the impact on oil demand from the coronavirus.

The oil cartel is also considering holding a ministerial meeting on February 14 and 15, earlier than a current schedule for a meeting in March.

All of these developments may negatively impact the Nigerian economy, especially the nation's budget performance.

Effects on Nigerian Economy

Last December, the Nigerian Senate passed the 2020 budget into law, approving N10.59 trillion as aggregate expenditure.

A breakdown of the budget figures showed that N560.4 billion was budgeted for statutory transfers, N4.84 trillion for recurrent expenditure, N2.46 trillion for capital expenditure and N2.72 trillion for debt servicing.

However, the fiscal deficit of the budget was put at N2.28 trillion while the deficit to Gross Domestic Product (GDP) ratio was 1.52 per cent.

Most importantly, the two major key assumptions upon which the 2020 budget was premised are a crude oil production of 2.18 mbpd and oil price benchmark of $57.

The proposed cut in supply by OPEC and the slump in prices in the international oil market could worsen the nation's fiscal concern for the year, with attendant effect on foreign exchange demand among local businesses.

On Monday, Brent crude closed 3.8% lower at $54.45 a barrel after being down more than 6 percent earlier in the day. West Texas Intermediate, the U.S. price gauge, briefly traded below $50 a barrel for the first time in more than a year and settled down 2.8% at $50.11.

Representatives of OPEC and its allies are reportedly set to meet on Tuesday and Wednesday to debate possible action amid corona virus outbreak. The oil cartel could then make a decision to reduce output at a possible meeting next week, raising the fear of nation's like Nigeria.

On Monday, JBC, an energy-consulting firm, cut its forecasts for China's oil consumption by one million barrels a day in February and March, amid signs refiners in the country have reduced their oil intake.

Nigeria slipped into recession in 2016 following a slump in oil prices and unrest in her oil-rich Niger Delta region. The nation would later recover from the economic recession in the second quarter of 2017 after oil prices appreciated and relative peace was restored in the delta region.

Last November, Action Aid Nigeria warned that set objectives for the 2020 proposal are unrealistic given the volatility in the global oil market and the increasing insecurity across the country. The social justice organisation also pointed out that the oil benchmark at $57, and the crude oil production of 2.18 barrels per day (bpd), are very unrealistic.

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