The price of Bonny Light, one of Nigeria’s crude grades, has dropped to about $12 – $13 a barrel this week. The price is $15 lower than the value of the global benchmark if crude oil, Brent crude, which stands at $28, as on Friday.
The development means that the current selling price is below the cost of production for Nigerian crude producers, which is estimated at $22 and the budgeted crude benchmark of $30 per barrel.
It appears the record supply cut by the Organisation of Petroleum Exporting Countries (OPEC) and its allies (OPEC+) could not save the crude, as the value dropped due to closure of industries across the world.
The global lockdown implemented by world leaders to contain the coronavirus pandemic has led to the closure of factories and refineries and in turn, a drop in global demand.
For instance, a large part of Europe, that constitute the major market for Nigeria, has gone into lockdown mode to combat the COVID-19 pandemic. In addition, even with lower oil prices, long-haul buyers from Asia do not want oil cargoes because there are also shipping costs to pay and no real need for the oil barrels since demand has plunged.
For Africa’s largest economy, this could become a big challenge, since the country has extraordinarily little storage tanks to keep its unwanted crude. According to IHS Markit, Nigeria will run out of storage space quickly if it doesn’t find ships to take its oil.
While a semblance of Nigeria’s critical condition is playing out across the globe, with oil cargoes often trading at huge discounts to crude oil contracts, the pain is extremely awful for Africa’s largest economy due to its heavy reliance on oil. Nigeria relies on crude sales for about 60% of government revenues and 90% of foreign exchange earnings.
Nigerian National Petroleum Corporation stated, ”The market is simply responding to the forces of demand and supply precipitated by the COVID-19 pandemic. We are working diligently to guarantee a steady market for our crude in the short and long term.”