News broke out on Monday that May WTI contract prices had plunged to negative territory as traders sold off their positions to avoid storage costs associated with physical delivery amidst declining oil demand.
Oil prices have continued its downward trend, with Brent crude falling below its average unit cost of production of c.US$23. To make matters worse, there are reports that Nigeria has cargoes of unsold oil with no buyers in sight, forcing the country to sell at a discount.
We understand that Nigeria’s Qua Iboe and Bonny light, two of its finest crude oil grades were trading at US$12/bbl as at the end of last week. This pales when compared with the revised budget benchmark price of US$30/bbl from US$57/bbl prior to the pandemic.
The situation is further worsened by the fact that the newly agreed OPEC production cuts would see Nigeria’s oil production quota slump to 1.4mb/d from 1.7mb/d excluding condensates.
The nation appears to be facing its worst fiscal position in many years this quarter. Prior to the steep decline in oil prices, FAAC revenues were already declining.
We expect this would be aggravated this quarter as the country grapples with the burden of unsold cargoes, declining prices, and a halt in economic activities due to the coronavirus outbreak with its negative impact on tax revenue collection.
We note the FIRS recorded a tax collection shortfall of N282.1bn in January before the lockdown commenced. Many states rely almost solely on FAAC revenue to meet salary obligations. A steep decline in FAAC revenue as anticipated this quarter may lead to a return to the recession-era when most states could not pay salaries.
At a critical time like this, when it appears some oil grades now costs less than water, policymakers need to go back to the drawing board to recalibrate their strategy in avoiding an unprecedented crisis. We are faced with no choice but to implement a clear diversification plan to rescue both the short term and long term fiscal positions of the country.
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