Concerns Mount over Falling Oil Prices Obinna Chima and Ejiofor Alike Despite the federal government’s assurance that there is no cause for alarm over falling crude oil prices, investors and financial market analysts have continued to express concern about the development. Brent oil prices sank to another four-year low yesterday arising from the weak outlook for global economic growth, massive shale oil production in the United States of America, a stronger US dollar and slowing growth in China. Oil prices also slipped when Iraq became the latest Organisation of Petroleum Exporting Countries (OPEC) crude exporter to cut its prices after similar moves by Saudi Arabia and Iran, according to analysts. Brent North Sea crude for delivery in November dipped to $88.03 a barrel in Asia yesterday, touching the lowest level since December 1, 2010. In midday London deals, it stood at $88.21 per barrel yesterday, down by $2 from last Friday’s closing level. US benchmark West Texas Intermediate (WTI) for November delivery also lost $1.38 to $84.44 per barrel. It had slumped on Friday to $83.59, last seen on July 3, 2012. This drop has also been largely attributed to global demand growth slowing to its weakest level in three years and buoyant non-OPEC supply led by the US shale boom – highest level in three decades. To this end, Lagos-based investment and research firm, Renaissance Capital (Rencap), in a report titled: “Sub-Sahara Africa: Lower Oil Price - A Scenario Analysis”, forecasts that Nigeria may devalue the naira to about N200/$1 if the oil price drops to $55 per barrel. The report said Nigeria’s 2015 current account (C/A) balance would turn negative if the average oil price falls below $85 per barrel. This is assuming oil output of 2.25mb/d versus 2.27 in the first five months of 2014. “However, we will begin to worry about the naira if the price falls below $90/bl, as this means a C/A surplus below one per cent of Gross Domestic Product (GDP) that fails to cover the financial account deficit of 0.5 per cent of GDP. “Our core scenario is an oil price of $105/bl, which implies a C/A surplus of 2.9 per cent of GDP and an exchange rate of N168/$1. We think the most plausible alternative scenario is an oil price of $95/bl. This means a leaner C/A surplus of 1.6 per cent of GDP and a weaker naira at N170/$1. “Our severe-risk scenario is an oil price of $85/bl, when the C/A barely balances and the naira depreciates to NGN172/$1,” it added. Rencap in the report maintained that the increased risks to the naira, among other issues, might compel the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to further tighten monetary policy at the November meeting, in particular through a hike in the private sector cash reserve requirement. “When the oil price falls in Nigeria, the break-even oil price (the oil price at which the budget balances), which is $111/bl for the 2014 budget, on our estimate, comes under scrutiny. “One potential concern is that the oil price will drop below this break-even price and result in the federal government failing to meet its fiscal obligations. We do not share this concern simply because the federal government has chosen to run a budget deficit, instead of balancing the budget, and has a conservative budget oil price of $77.5/bl,” it stated. In the same vein, a separate report by the Financial Derivatives Company Limited (FDC) titled: “Oil Price Fall Shows Nigeria’s Underbelly”, pointed out that the unexpected 22 per cent fall of Nigeria’s crude oil grade, the Bonny light from $116 per barrel in June to $88 per barrel in October had reminded Nigerians of the country’s economic vulnerability to exogenous shocks. “This is why the next OPEC meeting in November will be one of the most important for both the very rich and less wealthy oil producers. “At their next scheduled meeting on November the 27th, OPEC will seek to address growing concerns bordering on stability in the oil market. Oil prices have taken a hit in recent months, falling steadily from $116/bl in June to below $90pb – its lowest level in over two years,” it stated. Continuing, the FDC report said: “Oil prices are not alone in this plunge. They have followed the general trend of other global commodity prices (metals and agricultural) which have dropped to their lowest levels since the global financial crisis following concerns over slowing growth in China, growing supply in key markets and a strengthening US dollar.” OPEC’s monthly report for September indicated an expected fall in demand by 800,000bpd, bringing production down to 28.2mbpd (million barrels per day) from 30mbpd. The International Energy Agency (IEA), earlier this month also forecasted a fall in OPEC production to 29.6mbpd in 2015. The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, on Sunday said although contingency plans were being considered to prevent shocks to the economy following dwindling oil prices, borrowing from the International Monetary Fund (IMF) and other multilateral institutions was not in the bargain for now. Meanwhile, the IEA has acknowledged the significance of Nigeria’s energy reform, saying power generation will quadruple in Nigeria and other African countries between 2020 and 2040, due to the reform programmes. In its first Africa Energy Outlook released yesterday, the organisation stated that gas production would rise to 230 billion cubic metres (bcm) in 2040, led by Nigeria and the expansion of output from Mozambique (60 bcm), and Angola and Tanzania (20 bcm each). IEA, in its first comprehensive analysis of sub-Saharan Africa, said the region’s energy resources were more than sufficient to meet the needs of its population, but they are largely under-developed. The region, according to IEA, accounted for almost 30 per cent of global oil and gas discoveries made over the last five years, and it is already home to several major energy producers, including Nigeria, South Africa and Angola. The report noted that oil production would exceed 6mbpd in 2020 before falling back to 5.3mbpd in 2040, with Nigeria and Angola continuing to be the largest oil producers by far. On electricity supply, IEA said on-grid power generation capacity in sub-Saharan Africa was 90,000 megawatts (90 GW) in 2012, with around half being in South Africa and 45 per cent of this capacity is coal (mainly South Africa), 22 per cent hydro, 17 per cent oil and 14 per cent gas (mainly Nigeria). Insufficient, unreliable or inaccessible grid supply has resulted in large-scale private ownership of oil-fuelled generators and greater focus on developing mini- and off-grid power systems, said the report. “Reform programmes are starting to improve efficiency and to bring in new capital, including from private investors, and grid-based generation capacity quadruples in our main scenario to 2040, albeit from a very low base of 90 gigawatts (GW), today,” the report added. The report noted that over 620 million people in the region, about two-thirds of the population live without electricity, and nearly 730 million people rely on dangerous, inefficient forms of cooking, with average electricity consumption per capita not enough to power a single 50-watt light bulb continuously. The report said though the sub-Saharan energy system would expand rapidly to 2040, but so will the demands placed upon it. According to the report, energy demand in sub-Saharan Africa grew by around 45 per cent from 2000 to 2012, but accounts for only 4 per cent of global demand despite being home to 13 per cent of the global population. The region’s largest energy demand centres, said the report, are Nigeria and South Africa, which together account for more than 40 per cent of total energy demand on the continent.
Posted on: Thu, 16 Oct 2014 08:38:44 +0000