Senior Research Analyst at FXTM
April
20, 2020 will go down in the history books as the day when WTI crude futures
expiring in May plunged more than 300 percent, falling as low as minus $40.32
per barrel amid COVID-19 pandemic lockdowns.
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Utter
chaos ensued after the US benchmark prices for crude Oil went sub-zero for the
first time ever, driven down by the producer’s desperate attempt to pay buyers
to take the commodity off their hands. This was due to fears that storage
capacity could run out in May.
As Oil
sank, tanker stocks soared, reflecting an intense increase in demand for crude
storage space. It says a lot about the unprecedented nature of the coronavirus
pandemic when we see that the fastest-growing demand trend in the Oil markets
is for storage space. Prices rose spasmodically after Iran launched its first
military satellite, earning President Donald Trump’s ire. But this has not
changed the fundamental themes weighing on Oil.
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For
Nigeria, these fundamental themes of collapsing demand and oversupply are big
headwinds even if the country’s Oil is benchmarked against Brent Crude. The
Nigerian state depends on Oil for 60 percent of its revenues and 90 percent of
its foreign exchange. But with prices for several Oil benchmarks falling below
zero, Nigeria is generating massive losses for every barrel it produces,
meaning the economic outlook is growing more precarious.
It’s
likely that foreign exchange reserves will stay on the firing line while the
Naira remains exposed to downside shocks. A further weight on the currency and
government revenues is that Nigeria spent four times as much money subsidising
fuel versus building schools, health centres and science labs in 2019. Another
inefficiency which may come back to haunt is the fact that Nigeria produces
crude Oil which is sold to the US, China and Europe only to re-import natural
gas at higher prices.
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With
the cost of producing Oil at around $15-$17 per barrel, the current volatility
and weakness in Oil prices may fuel fears of a sovereign debt crisis. Nigeria’s
total debt stands at around $84 billion with up to 80% of its bilateral debt
owed to China. Already, Fitch Ratings has cut Nigeria’s Long-Term Foreign
Currency Issuer Default Rating (IDR) to B from B+.
Weakening
outlook notwithstanding, Nigeria is making the same choice as most other world
governments - to stop the spread of coronavirus. The plan is to raise as much
as $6.9 billion from multilateral lenders to help fund efforts to stop the
disease in its tracks. This is the right choice, and could give the economy a
better chance to recover more quickly after the pandemic ends.
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Meanwhile,
the short-term outlook for Oil prices remains grim due to demand destruction
and slowing global growth after China experienced an economic contraction in Q1
on top of a lack of storage space.
Given
that Oil sector weakness is set to remain a dominant theme in the short-to-near
term, Nigeria must act fast and break away from the chains of Oil reliance to
other sustainable sources of growth. Diversification is the lifesaving elixir
to Nigeria’s ailments but the benefits will not happen overnight.
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Digitalisation
has become a hot trend in many countries as populations and governments seek to
reduce human contact but increase human connection. In the same vein, the
government’s ‘Change’ agenda has never been more important than it is now.
Technology and innovation may be the focus of increased investment as other
economic sectors come to a standstill under lockdowns.
To sum
up the new reality, Nigeria has displayed resilience to external and domestic
risks in the recent past but the coronavirus pandemic and collapsing Oil prices
could present one of the biggest economic tests in its history. Will Nigeria be
able to weather the storm, evolve and rise from the ashes like a phoenix or
will Africa’s largest economy face the same fate as Venezuela and Zimbabwe?
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My
sincere hope is that the economy will adapt quickly, resulting in a
faster-than-expected comeback.
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