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Russia-Saudi oil deal can’t hide need for Nigerian diversification

By David Whitehouse
Posted on Tuesday, 14 April 2020 09:41

Seplat may benefit in the short term from the Russian-Saudi oil production agreement. Photo: Seplat Petroleum Resources.

OPEC’s agreement to cut global oil output by 9.7 million barrels a day in May and June, finalised on Sunday, buys Nigeria a little time.

The cuts, equivalent to close to 10% of world output, follow failure to agree to reductions in March, which prompted an oil price collapse. Nigeria’s petroleum resources minister Timipre Marlin Sylva now says he expects oil price to quickly rebound by $15 per barrel.

But any optimism on the part of oil producers that there will be a lasting détente between Russians and Saudi Arabia—even if they’re able to convince other major suppliers like Mexico to also cut production—will “likely prove myopic”, says Harry Broadman, chair of the emerging markets practice at Berkeley Research Group LLC in Washington.

“The simple fact is there has been a huge structural downshift in oil demand globally because of the COVID crisis. In such a setting—one that hasn’t existed for a generation—there will be blood on the floor for all oil producers.”

The deal means there may be temporary relief of any immediate need for further devaluation of the naira, says Broadman.

  • But in the longer term, “there simply is no more important policy goal for the leadership than the diversification of the economy into the non-oil sector. I shudder to think what more will it take” for the government to be convinced that it must act.

According to Fitch, hydrocarbon revenues represented 57% of Nigerian current-account receipts and nearly half of fiscal revenue over the last three years.

  • “Low fiscal revenues present a major challenge to debt sustainability”, Fitch says.
  • The firm expects the general government deficit to widen to 5.8% of GDP in 2020 from 3.8%.
  • Any spending cuts that can be achieved will be offset by higher health service costs needed to fight coronavirus, Fitch says.

READ MORE: Nigeria’s banks face direct hit from geared-up oil producers

Half the Ransom

Rystad Energy estimates that the global demand-supply imbalance for April is 27.4 million barrels per day, and says such volumes are physically impossible for the market to absorb.

  • The firm predicts renewed downward pressure on oil prices.
  • OPEC has “only come up with half of the ransom money,” says Bjornar Tonhaugen, Rystad’s head of oil markets in Oslo.
  • “We believe the market’s disappointment will reflect in prices from April due the lack of size and the speed of the supply removal.”
  • The deal at least means that the oil market may not exhaust storage capacity as early as it was set to, Tonhaugen says.

Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos, is optimistic that the agreement will be enough to enable the authorities to maintain the naira at its current level.

He expects that the agreement will allow Nigeria to keep the naira at the current level, and the outlook for Nigeria’s indigenous oil producers “will be brighter. Their ability to meet their obligations will definitely improve.”

But, Ojo says, the accord won’t be enough to resolve current fiscal challenges unless it takes prices to around $70. That, he says, “may not be achievable with current agreement.” Brent crude was at $31.3 per barrel on April 13.

Bottom Line: Nigeria may not get another chance to diversify state revenues away from hydrocarbons if it doesn’t do it now

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