Global oil prices declined significantly late yesterday as news reports filtered into the market of an impending price war between Saudi Arabia and Russia. Specifically, Brent, the international benchmark for crude oil suffered its biggest loss since the Gulf War in 1991, declining 26% to US$33.39/b (as of writing) from US$45.27 where it closed on Friday.
The sharp plunge in oil prices was triggered by fallout in the OPEC+ alliance after Russia pulled back from Saudi Arabia’s demand for deeper output cuts to further tighten global supplies to provide support for crude oil prices, given slowing global demand occasioned by the impact of coronavirus. Saudi Arabia, in response to Russia’s disagreement to back deeper production cuts, has vowed to flood the market with crude in a bid to recapture market share.
We recall that the agreement between OPEC and non-OPEC producers (majorly Russia) to curtail oil supplies in an effort to bolster prices dates back to 2016 when the alliance (OPEC+) agreed to a cut of 1.2 million barrels per day which came into force in January 2017.
On December 6, OPEC+ voted to deepen output cut by an additional 500,000 bpd, which increased the total production cut to 1.7mb/d. The agreement was expected to run until March 2020, with market expecting that the agreement would be renewed and extended for the rest of the year.
However, falling crude oil prices in the wake of the coronavirus which dampened global oil demand forced Saudi Arabia to propose an additional production cut of 1.5 million barrels per day (bpd) on 5 March. This move did not go down well with Russia, escalating tensions between the “big wigs” of the OPEC+.
Consequently, market participants are increasingly wary of a breakdown in the long-standing agreement that has remained supportive of crude oil prices despite rising shale oil production in the U.S. The dramatic turn of events has taken global oil markets to its level prior to OPEC’s alliance with Russia in 2016.
Bringing the development in the oil markets to Nigeria, we believe the rhetoric about an impending devaluation in the local currency will gather momentum considering the elevated threat to foreign exchange earnings and in turn the nation’s FX reserves which the apex bank relies on to maintain liquidity and support the local currency.
The prospect of a reconciliation between Saudi Arabia and Russia is uncertain. We note however that oil prices trading at current levels for a prolonged period will significantly undermine government revenue considering that the 2020 budget was benchmarked on an oil price assumption of US$57/bbl. With elevated debt servicing cost, rising recurrent expenditure amidst weak fiscal buffers, we are of the opinion that nation may be on course for another fiscal crisis.
That said, we anticipate a widespread sell-off in the financial markets as investors scale down on their holdings to gain more clarity on the developments in the oil markets. As of the time of writing, the NSE All share Index is down about 1.7% as we go to press with almost all the top names on full offer. The negative investor sentiment has also filtered in the fixed income market, as yields are currently on the uptrend.