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Nigeria faces mixed oil market outcomes as China-US trade war intensifies

Concerns that the rising China-US trade dispute could slow the global economy and that US sanction on OPEC members, Iran and Venezuela, will further tighten the oil market present Nigeria with mixed fortunes.

Slower global economic growth as a fallout from the trade dispute between China and the United States of America means less demand for oil, because oil demand is a function of economic activities. Less demand for oil implies oil prices will start falling, which is some bad news for Nigeria. But a tightened oil market will further shore up prices, good news for Nigeria’s economy managers.

Brent crude oil futures were at $71.12 per barrel at 0710 GMT Tuesday, 12 cents, or 0.2 percent, below their last close. US West Texas Intermediate (WTI) crude futures were at $62.30 per barrel, 5 cents above their last settlement.

Nigeria, Africa’s biggest crude producer, is exposed either way to whatever happens at the international oil market because its economy is still heavily dependent on its petroleum sector. Oil still makes up 90 percent of foreign exchange and 80 percent of government revenue but contributes less than 10 percent of gross domestic product.

Against this backdrop, Oyindamola Adedokun, outcome lead, revenue stream at FOSTER, an Oxford Policy Management programme, says it is time to take out fuel subsidies and put a proper stabilisation mechanism in place as buffer.

“Nigeria’s revenue this year is going to fluctuate, given these two major factors in the global oil market,” Adedokun said. “We are just barely out of a recession and if nothing is done to fix the petroleum sector, Venezuela may be our destination.”
Maritime consultancy and shipbuilding tanker brokerage Eastport said in a note that “worsening trade friction between Washington and Beijing poses a downside risk” to its forecasts for petroleum products.

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The US sanctions have already halved Iranian crude oil exports over the past year to below 1 million barrels per day (bpd), and shipments to customers are expected to drop to as low as 500,000 bpd in May as sanctions tighten.

Beyond Iran, Washington has also placed sanctions on the Venezuelan government under President Nicolas Maduro, disrupting supplies from the country, a founding member of the Organisation of the Petroleum Exporting Countries (OPEC).

“As sweet as Nigeria’s crudes are renowned to be globally, we have recently lost our most-valued customers and our gas buyers are themselves now competing with us in the same market space as suppliers,” Luqman Agboola, head of infrastructure at Sofidam Capital Limited, told us.

One of the assumptions undergirding Nigeria’s 2019 budget is crude oil estimate of $60 per barrel. But with Brent at $71 per barrel, Africa’s most populous economy has opportunity to save $10 on each barrel of oil sold. The catch, though, is that there is no constitutional backing to save money from sales of crude oil above the budget benchmark, which is supposed to go into the Excess Crude Account domiciled at the Central Bank of Nigeria.

“There is no legal backing for the excess crude account. The Constitution says revenue accruing to the Federation Account should be shared; there is no provision to save for future generations,” said Oby Ezekwesili, who was part of the economic team under former President Olusegun Obasanjo that proposed the establishment of ECA.

This means the economic wellbeing of Nigeria and its citizens remains significantly exposed to external shocks, driven by whichever direction oil prices go.

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