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At 60, can Nigeria keep depending on Crude Oil?

Six decades after the discovery of oil, can Nigeria continue to depend on the black gold as its mainstay?

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At 60, can Nigeria keep depending on Crude Oil?

As the economies of oil-dependent countries stifle, Nigeria’s dependence on oil has been brought into cross-examination for the umpteenth time. With a growing population of over 200million people, a struggling economy, and fall in oil price, can we continue to depend on this black gold?

Nigeria first discovered oil at Oloibiri, Bayelsa in 1956 – four years before independence, and began production of crude oil the following year. By 1960, about 847,000 tonnes of crude oil was exported. The country became a member of Organization of the Petroleum Exporting Countries (OPEC) in 1971. Notably, Crude Oil accounts for about 10% of Nigeria’s GDP, and 90% of total exports revenue; which begs the question, for how long?

READ: Why IMF excluded Nigeria from list of countries granted debt relief

Experts and economists have clamored for the diversification of an economy that has been subjected to volatile oil price fluctuations. In April 2020, when oil was sold at negative prices, supply crippled, and cargoes of oil were stuck on water; eyebrows were raised as to how long our economy will survive on this dependency. Forex inflows diminished, as the CBN was forced to devalue the naira in line with global realities, after several months of playing hardball. To exacerbate issues, OPEC+ could not agree on reducing market supply and in some weeks of recklessness, member countries created a supply glut that could bury the oil markets. But for the intervention of the US President, Donald Trump, Nigeria would have been in the middle of an oil crisis, even though the OPEC Secretary, Mohammed Barkindo, is a Nigerian national.

READ: New PIB amends royalties by oil firms as Sylva clarifies position on scrapping of NNPC

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During the recent oil crisis, Russia and Saudi Arabia said they could afford low oil prices. Both economies had other sources of revenue, and deep cash reserves they can use to support their economy. Which begs the question? Can Nigeria boast like these other nations?

READ: Historic OPEC+ oil deal still under threat as negotiations drag

Nairametrics had earlier questioned if agriculture can replace oil, and a breakdown of agricultural exports showed it would take a lot of investments for it to generate the revenues that oil currently commands.

Nigeria is faced with revenue decline, as we have been compelled to reduce output to stabilize the oil market. Although the country was accused (albeit true) of cheating quotas and output cuts with other countries, as OPEC and its allies decided to reduce global oil supply. The recent deal required OPEC member countries, including Nigeria to cut their output from 9.6 million bpd to about 7.7 million bpd in a bid to stabilize the oil market. Consequently, the FG adjusted the budget benchmark to about $25 per barrel.

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READ: World Bank says Nigerian banks are at risk of being destabilised by COVID-19

How efficient are the country’s refineries?

Nigeria has four major oil refineries. Namely, the Warri Refinery and Petrochemical Plant, which has the capacity to process close to 125,000 barrels of crude per day. The new Port Harcourt Refinery, with a capacity to produce 150,000 barrels per day. There is also the ‘old’ Port Harcourt Refinery, with subpar production and lastly, the Kaduna Refinery.

Early this year, the Nigerian National Petroleum Corporation (NNPC) published audited financial statements. In a report by Bloomberg, the corporation has been censured for years for not publishing audited reports.

READ: Crude oil prices stay stable, but remain under $40/barrel

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In 2018, the first three refineries reported a combined loss of N154 billion, while the Kaduna refinery recorded zero revenue.

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The country still cannot refine petroleum products to supply her internal demand, and that is why the imminent Dangote Refinery, expected to open in the next few years, is targeting a daily capacity of 650,000 barrels.

NNPC led by Malam Mele Kyari, the Group Managing Director, published online the 2018 audited accounts for its 20 subsidiaries and business divisions for the first time. According to the statement, National Petroleum Investment Management Services (NAPIMS), is the group’s most profitable division.

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READ: BREAKING: It makes no sense for oil to be cheaper in Nigeria than Saudi Arabia – President Buhari

It reported revenue of N5.04 trillion ($13 billion) in 2018 and profit of N1.01 trillion. That compared with a loss of N1.65 trillion in 2017.

The report shows total assets managed by NAPIMS at N18.6 trillion, with the oil and gas components valued at N14.2 trillion.

Its oil production subsidiary, the Nigerian Petroleum Development Company (NPDC), reported a post-tax profit of N179 billion in 2018.

READ: On NNPC and the Overhaul Project of the Refineries

Outlook for the short-term

Nigeria has sought to diversify the economy, however there is still huge focus on its main export – Oil. The coronavirus (COVID-19) has changed how the oil economy will operate forever. In 2020, global oil demand contracted for the first time since 2009 global recession. With restrictions imposed in some cities, demand might not reach pre-pandemic levels, as global air travel still grapples with the effect of lockdown.

Although recovery improved in the second half of 2020, prices have failed to reach the $50 mark. Ultimately, the outlook for the oil market will depend on how coronavirus can be contained, because economic activity depends on the global health crisis. On the supply side, Libya seems to be back in the foray, as tensions are easing in the area. Even before the pandemic, markets had been over-supplied, leading to OPEC+ producers cutting output with competition from American Shale oil. There are indications that the oil market looks supplied through 2025.

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READ: AFREXIMBANK disburses US$200 million to Zenith Bank 

Given the cycle of the industry and the demand contraction in 2020, a rebound in 2021 is expected. Forecasts shows that between the periods 2019 and 2025, global oil demand will grow at an average annual rate of just below 1 mb/d.

Dapo-Thomas Opeoluwa is a Global Markets analyst and an Energy trader. He is currently an MSc. Student in International Business, Banking and Finance at the University of Dundee and holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and the financial marketplace.You may contact him via his email- [email protected]

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Commodities

Gold prices suffer worst two weeks in a row since November

Gold futures prices at their most recent trading session settled at $1,829.90 an ounce, down by 1.2%.

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Nigeria Mining Sector shows growth prospect despite low bank credit provision, Gold hits eight-year high as global recession sentiments strengthened, Gold hits three weeks high, Investors rush to gold, Gold Future Drops to $1727.80 as Tensions Escalate between America and China, Precious metals slump, investors focus on Central Bank’s intervention, FG inaugurates gold refinery project in a landmark event

Gold prices suffered significant losses at their most recent trading session.

The yellow metal lost its shine at the expense of charging U.S dollar, whose surge of late astonished many investors amid the currency debasement expected from the U.S President-elect’s proposed $1.9 trillion COVID-19 support programme.

READ: Gold suffers worst monthly drop in four years

What you should know

  • Gold futures at their most recent trading session settled at $1,829.90 an ounce, down by 1.2%.
  • Although the yellow metal’s recent loss on a weekly basis moderated to just 0.3% on the week, that loss added to the previous week’s plunge of 3.2% — handing gold its worst two weeks in a row since November.
  • The greenback was an outlier at the last trading session despite drops seen in U.S bond yields associated with the benchmark 10-year U.S. note, whose resurgence in the previous week had been the catalyst for the U.S dollar comeback.

READ: Copper hits six months high, Industrial demand spur bullish run

Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, gave insights on the odds weighing on the yellow metal in the near term.

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  • “With short dollar trades tempering over the great US dollar debasement story of 2021, it’s not such an easy glide path for gold to start the year. So, I suspect gold remains tied to the hip of the US dollar fortunes this quarter. The market then morphs into “sell the rally mode” as the US economy recovers tangentially to the vaccine distributions.”

READ: Silver surpasses three-week high, joins Bullish momentum

Bottom line

Investors are increasingly confronted with the reality that the pandemic is still far from being under control, thereby flocking back to the safe-haven currency despite the significant progress that was made in the past few months, and several COVID-19 vaccines already in the market.

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Commodities

Oil prices suffer worst trading loss in a month

Oil prices were under pressure on fears of recent lockdown measures sighted in China.

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Crude Oil worker, OPEC, oil prices, Bulls hit back to support US crude oil amid panic sell- offs in global equity markets, Nigeria’s local oil players smashed by low crude oil prices

Crude oil prices suffered their worst trading loss in a month, tumbling by more than 2% at Friday’s trading session.

Oil prices were under pressure on fears that recent COVID-19 lockdown measures sighted in the world’s largest buyer of crude oil, China, could in the coming days exhibit weakness in energy demand.

What you should know: A strong U.S dollar, the currency on which crude oil is primarily sold, made purchasing of the commodity less competitive for holders in other currencies like the Euro, Japanese yen, thereby weighing on oil prices

  • U.S based oil contract, West Texas Intermediate futures, plunged by 2.2.% to settle at $52.36 per barrel. It is the oil contract’s biggest one-day drop since December 18, although it rounded out the week with a 0.5% upsides.
  • The British-based oil contract, which is the global benchmark for crude, settled down $1.32, after losing 2.3% at $55.10. For the week, Brent crude prices lost about 1.6% in value.
  • The world’s second-largest economy ramped up lockdowns yesterday, after reporting the highest number of daily Covid-19 cases in more than 10 months.

China capped a week that has resulted in more than 28 million people under lockdown as it suffered its first COVID-19 death on the mainland since May.

Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, spoke on the prevailing macro conditions keeping oil prices relatively high, taking into account Saudi’s recent pledge to curb production, and the influx of COVID-19 vaccines to tame the ravaging virus:

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“With Saudi Arabia providing the cornerstone and bridging the gap to vaccine oil market lift-off. With the renewed enthusiasm about the US demand recovery due to the prospects for more stimulus and the new administration’s pledge to focus on the vaccinations’ rollout, oil prices are lifting higher locking to hash out higher ranges.”

What to expect: Oil traders are entering a critical phase as oil remains sensitive to the news, with negative implications for the demand recovery.

The oil market recovery is vital for blunting the effect of higher nominal US Treasury yields through the reflationary channel. If oil doesn’t fly higher, the reflation trade could fall flat on its face.

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Commodities

Oil drops amid strong import data from world’s largest buyer

Oil prices are under pressure, and recent customs data reveal that crude imports into China were up 7.3% in 2020.

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global oil market, Bonny Light and Brent crude oil, Arthur Eze, Nigeria cuts crude oil production to 1.77mbpd, Nigeria wants international oil companies to pay up now , OPEC+ deal gets a boost as Russia and Saudi Arabia consider further output cut, 4 key reasons why Brent crude might slip back to $35 per barrel, How substantial is compliance for the Oil market?

Oil prices drifted lower at the last trading session of the week. Surprisingly oil prices are down in spite of strong import data from China on the bias that the recent COVID-19 outbreak in the world’s largest crude oil importer has led to major lockdown measures.

READ: Oil prices rally up as market looks to OPEC+ meeting

What you need to know

  • At the time of writing this report, Brent oil futures were down by 0.32% to $56.24 a barrel, and the West Texas Intermediate futures down by 0.11% to $53.5o a barrel.
  • Oil prices are under pressure, and recent customs data reveal that crude imports into China were up 7.3% in 2020.

READ: FG borrows N2.8 trillion from CBN via Ways and Means

Stephen Innes, Chief Global Market Strategist at Axi in a note to Nairametrics, spoke on the prevailing macro conditions keeping oil prices relatively high, taking into account Saudi’s recent pledge in curbing production and the influx of COVID-19 vaccines to tame the ravaging virus in causing more harm;

“Oil prices are higher rising to a fresh ten-month high on stimulus expectation as consumers could spend a portion of the direct deposit on gasoline purchase.

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READ: Nigeria’s Bitcoin peer to peer trading for 2020 is $352 million

“But it’s perhaps the infrastructure component of the US stimulus efforts that will resonate bigger given the current COVID19 concerns that are pushing back on gasoline demand.

“And with Saudi Arabia providing the cornerstone and bridging the gap to vaccine oil market lift-off. With the renewed enthusiasm about the US demand recovery due to the prospects for more stimulus and the new administration’s pledge to focus on the vaccinations’ rollout, oil prices are lifting higher locking to hash out higher ranges.”

READ: Nigeria’s GDP growth to rebound between 1.7% and 2.0% in 2021 – United Capital report

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What to expect;  Oil traders are entering a critical phase as oil remains sensitive to the news with negative implications for the demand recovery.

  • The oil market recovery is vital for blunting the effect of higher nominal US yields through the reflationary channel. If oil doesn’t fly higher, the reflation trade could fall flat on its face.

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