The Organisation of Petroleum Exporting Countries, OPEC agreed on Thursday November 30, to extend Nigeria’s Oil Cap. OPEC capped Nigeria’s oil output at 1.8 million barrels per day, in November 2016, following its agreement to push for production cuts for other member countries .
This time last year, Nigeria’s premium oil brand, Bonny Light sold for about $45 per barrel. The economy was in recession and facing multiple headwinds with uncertainty on what the future holds. The news that OPEC had agreed to cut its production was seen as a positive move towards pushing back the persistent slide in oil prices that characterized 2016. For Nigeria, alongside Libya, it was exempted from any cuts.
Fast forward to 2017; the economy is out of recession, exchange rate is stable, foreign investors are back and crude oil price is now above $60 per barrel. Following the conclusion of its biannual meeting in Vienna, OPEC has agreed to continue to cut oil supplies by 1.8 million barrels leaving Nigeria and Libya to retain its 2017 caps.
What this means for Government
In a significant boost to Minister of State for Petroleum’s standing, Ibe Kachikwu, the news gives the Federal Government a boost for its ambitious N8.6 trillion budget which is bench-marked at $45 per barrel and a production level of 2.3 million barrels per day.
The latest GDP report by the National Bureau of Statistics highlighted the impact of oil on Nigeria’s GDP growth rate. According to the data, Oil Real GDP grew at about 25.8% in the third quarter of 2017 compared to a negative growth of -0.76% for non-oil GDP.
The growth was buoyed by increase in crude oil output this quarter compared to the previous quarter in 2016 when crude oil output was stuck down by militant bombings.
2018 is also a pivotal year for the government, as it is the last full year before the elections set for 2019. If the economy continues to improve in 2018 on the back of oil then an emboldened presidency could be too formidable for any opponent in 2019.
What it means for the economy
OPEC’s decision to cap Nigeria’s crude oil is expected to help improve Nigeria’s forex inflow from Oil which stood at about $5.5 billion according to CBN data as at July 2017. This is still lower than 2016 inflow of about $6.4 billion in the same period and short of the $24.4 billion recorded in the same period in 2014.
As Nigeria’s crude oil output continues to increase in the coming months, the country will benefit from a surge in prices, giving the economy the boost it needs. Forex inflow from oil is included in the CBN’s external reserves which is directly linked to the stability in the exchange rate.
Nigeria’s exchange rate crash and volatility was a key reason for pushing Nigeria into recession in 2016. 2017 has been fairly stable on the back of the I&E window introduced by the CBN, as such we expect this to continue next year. Stability in the oil sector and maintaining production levels will also improve Nigeria’s foreign exchange earnings in 2018.
A Nigerian economy that experiences a protracted period of exchange rate stability typically injects confidence in the economy and boost investments across key sectors. Thus, the business environment could be better in 2018.
Other issues remain
The non-oil sector is still in recession and not yet out of the economic doldrums. The government will thus need all the inflows it can get (oil inflow, tax and debts) to stimulate the economy via massive spending on capital projects. Achieving this, requires a stable oil market with production levels large enough to improve forex inflows.