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Coronavirus Crashes Oil Price to $30, Reduces Nigeria’s Revenue Projection

As Coronavirus (COVID-19) maintains its spread to more countries, forcing lower demand for crude oil and attendant push for production cuts to stabilise prices by the Organisation of Petroleum Exporting Countries (OPEC), the black gold’s price plunged 30 per cent in early trading last night following the failure of OPEC to strike a deal with its allies on production cuts.

The deal’s collapse sparked fears of a price war as Saudi Arabia slashed its oil prices and reportedly gets set to boost production. Before the disagreement between OPEC and its allies, oil prices had dropped sharply this year as the coronavirus outbreak has led to softer demand for crude.

International benchmark Brent crude futures plummeted 30 per cent to $32.05 per barrel, while the United States’ West Texas Intermediate dropped 27 per cent to $30 per barrel, its lowest level since February 22, 2016.

It will be recalled that when the price of oil slumped to $27 per barrel in February 2016, it plunged Nigeria into recession. The current sharp drop in oil price will also threaten the implementation of the 2020 budget.

Nigeria’s 2020 budget of N10.594 trillion was predicated on the daily oil production rate at 2.18 million per barrel, and benchmark price to $57 per barrel.

Unless in the unlikely event of production jumping above 3million barrels per day to offset the price drop, the country will not be able to fund its 2020 budget.

However, after the initial drop the losses were pared somewhat, with each contract trading down slightly more than 21 per cent.
While Brent recovered at $35.40 per barrel, WTI traded at $32.17 per barrel.

On Thursday, OPEC recommended additional production cuts of 1.5 million barrels per day starting in April and extending until the end of the year.

The proposal was conditional on support from non-OPEC producers, including Russia. OPEC cautioned that the deal could only be applied on a pro-rata basis with core members set to cut 1 million barrels per day and non-OPEC partners expected to cut 500,000 barrels per day.

But OPEC ally Russia rejected the additional cuts when the 14-member cartel and its allies, known as OPEC+, met on Friday. The meeting also concluded with no directive about the production cuts that are currently in place, but set to expire at the end of the month.

On Saturday Saudi Arabia announced massive discounts to its official selling prices for April and the nation is reportedly preparing to increase its production above the 10 million barrel per day mark, according to a Reuters report.

The kingdom currently pumps 9.7 million barrels per day, but has the capacity to ramp up to 12.5 million barrels per day. “We believe the OPEC and Russia oil price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years,” Goldman Sachs said in a note to clients.

“The prognosis for the oil market is even direr than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus,” the firm added.

Goldman cut its second and third quarter Brent forecast to $30 per barrel, and said that prices could dip into the $20s. Saudi Arabia’s price cut followed a breakdown of talks in Vienna last week.

Analysts say Saudi Arabia is encouraged by its low marginal cost of production put at US$8.98 per barrel, which is the lowest in the world, while the highest is in the United Kingdom at US$44.33.

Nigeria at $30 per barrel for deep water and $15 for onshore production, they say, would be badly hurt by a price war. According to the analysts, Saudi Arabia’s low oil production costs derive from three advantages: abundant pools of oil close to the surface and the sea, public ownership and no taxes on production.

With this, they say, it can make money in almost any oil price environment. With this disagreement, oil prices plunged more than 10 per cent on Friday, with WTI sliding 10.07 per cent, or $4.62, to settle at $41.28, its lowest level since August 2016.

It was WTI’s worst day since November 28, 2014. Brent had also slid 9.4 per cent to settle at $45.27 per barrel.

Meanwhile, the cartel and its allies agreed to meet again to monitor the situation. The current production cuts will be in place until the end of March as planned, but it’s uncertain if they will extend beyond this month.

Russian Energy Minister Alexander Novak told reporters leaving the meetings in Vienna on Friday that it meant that members could now pump what they liked starting April 1.

“We have made this decision because no consensus has been found of how all the 24 countries should simultaneously react to the current situation. So as from April 1, we are starting to work without minding the quotas or reductions which were in place earlier but this does not mean that each country would not monitor and analyse market developments,” he said.

CNBC reported that this effectively means that producers will soon have free rein over how much they pump.

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