• As 2021 budget over $30pb above benchmark
• Economic crisis may persist over $300m a month under-recovery
In a recent note to its clients, a US bank, Goldman Sachs, stated that current global dynamics – unleashed pentup travel demand due to the rollout of vaccinations in Europe and parts of the developing world – will spark “the biggest jump in oil demand ever, 5.2 million barrels per day rise over the next six months”.
The volume of new demand will be unable to be matched by immediate increases in supply. The bank, at the start of March, had forecast a rise in Brent 10 Crude prices to hit $80pb by the third quarter of this year. However, there will be lower interest rates globally as Central Banks in many advanced economies try to support economic recovery.
Moreover, a weaker US dollar will also prop up global commodity prices in the coming months. Despite the upward looking of the global crude oil dynamics, PAUL OGBUOKIRI reports that Nigeria will be in a dilemma of the rising oil prices and rising fuel subsidy
Oil rally pushes government revenue above budget benchmark
According to Dr Ayo Teriba, Chief Executive Officer (CEO) of Economic Associates, the recent upturn in the price of the international oil benchmark, Brent crude, has pushed Nigeria’s oil revenue above the estimate in the 2021 budget. He said the development portends good fortunes for the troubled Nigerian economy. He said the excess is supposed to go into the country’s excess crude account.
“In all, there will be enough foreign exchange and foreign reserves will no longer be under the threat of being depleted any time.” He warned however, that this was not another opportunity for partying and extravagance, saying that there should be prudence Brent, against which the country’s crude oil is priced, has been trading more than $20 higher than the Federal Government’s benchmark for this year’s budget in recent months.
The 2021 budget, which was signed by President Muhammadu Buhari, on December 31, was based on an oil price benchmark of $40 per barrel and a production level of 1.86 million barrels per day.
According to the budget, 30 per cent (N2.01trillion) of projected revenues is to come from oil-related sources while 70 per cent is to be earned from non-oil sources. Brent crude, which closed at $51.22 per barrel in December, reached the $60 per barrel mark in February and rose further to as high as $70 per barrel before paring some of its gains. It closed at $64.86 per barrel last Thursday.
For Nigeria, which relies on crude oil for about 50 per cent of government revenues and over 90 per cent of export earnings, rising oil price means increased revenue.
On the other hand, the rising oil price also translates to increased cost of petroleum products as the country depends heavily on imports due to a lack of domestic refining. Using an average price of $60 per barrel and a production level of 1.42 million barrels per day, the country’s total oil revenue stood at $2.39 billion in February, compared to budgeted revenue of $2.08 billion.
The Organisation of the Petroleum Exporting Countries (OPEC) in its monthly oil market report for March, said the country’s oil production rose by 63,000 barrels to 1.42 million bpd in February, based on direct communication. OPEC had in February said the rise in global oil prices could brighten Nigeria’s outlook this year.
Oil price exceeds $73 on improving demand outlook
The international price of crude oil continued its rise on Monday, extending three weeks of gains on the back of improving outlook for fuel demand as countries ramp up the lifting of travel restrictions, leading to tightening commodity supply.
While Brent crude, Nigeria’s oil benchmark, was up by over 35 cents, or more than 0.7 per cent, at $73.47, the highest since May 2019, U.S. West Texas Intermediate (WTI) gained over 31 cents or 0.5 per cent, to stand at $71.73 a barrel, earlier reaching the highest since October 2018.
Founder of Centre for Value in Leadership (CVL) and a professor at Lagos Business School, Pat Utomi, said the rising demand of crude oil is as a result mass transport returning to pre-pandemic levels and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased, driving three weeks of increases for the oil benchmarks.
He said, however, that the rising international oil prices posed a dilemma to Nigeria, which is earning the much-needed foreign exchange, but also portends increased importation costs for petroleum products and by extension the landing cost. Sunday Telegraph notes that in March, the Nigerian National Petroleum Corporation (NNPC) said it was paying about N120 billion in petroleum subsidies monthly, even at a time crude oil price was lower.
Since April, the NNPC has been unable to contribute to the Federal Account Allocation Committee (FAAC) due to payments to cover subsidy on petroleum imports. However, the NNPC said the payment of subsidies was not affecting its obligations to its partners, although it would not be able to contribute to the account from where states and local governments get their monthly allocation.
The prevailing market conditions also coincide with Nigeria’s falling crude oil production output levels which hit record low levels in May 2021, according to OPEC data. The report indicated that in the first quarter of 2021, Nigeria’s average production was 1.410 million barrels per day. In April, production stood at 1.460mbpd and was 1.388 barrels per day in May, leading to the loss of 72,000 daily barrels during the month.
But based on direct communication with OPEC, the cartel put the figure at 1.429 million barrels per day in March, 1.372 barrels per day in April and 1.344 mbpd in May, resulting in a shortage of 28,000 barrels between April and May.
The country’s average crude oil production based on secondary sources was 1.78 Mbpd in 2019 and 1.57mbpd in 2020, while total OPEC 13-member crude oil production averaged 25.46 mb/d during the month of May
Fuel subsidy wipes off oil revenue
It would be recalled that the Nigerian National Petroleum Corporation (NNPC) had said that it would remit nothing into the federation account in the month of May due to costs incurred from subsidy payments on petrol.
The NNPC made this known in a letter written to the Accountant-General of the Federation, where it explained that it recorded a value shortfall of N111 billion in February 2021. The shortfall, the NNPC said, would affect its contributions to federal allocations to states for April and May.
The announcement would have telling consequences for the nation’s economy. Nigeria relies on oil receipts for most of its monthly expenses, including workers’ salaries.
NNPC said the decision became necessary in order to bridge the gap between the landing cost and ex-costal price of petrol, ensure the continuous supply of petroleum products to the nation, and guarantee energy security.
The letter was dated April 26 and signed by NNPC Chief Financial Officer, Umar Isa. Those copied in the letter included the Minister of Finance, Budget, and National Planning; the Director General, Nigeria Governors Forum; the Director Home Finance; and the Chairman, Commissioners of Finance Forum.
“The Accountant General of the Federation is kindly invited to note that the average landing cost of Premium Motor Spirit (PMS) for the month of March 2021 was N184 per litre as against the subsisting ex-coastal price of N128 per litre, which has remained constant notwithstanding the changes in the macroeconomics variables affecting petroleum products pricing,” the NNPC said.
“As the discussions between government and the Labour are yet to be concluded, NNPC recorded a value short fall of N111, 966,456,903.74 in February 2021 as a result of the difference highlighted above. Accordingly, a projection of remittance to the Federation for the next three months is presented in the attached schedule.
NNPC won’t phase out subsidy
NNPC said it would continue to bear the cost differential on the actual landing cost and the N165 pump price of petrol it sells to wholesalers and retailers, “until the conclusion of ongoing engagement with the organised labour and other stakeholders.”
Utomi and Teriba believe the decision over the implication of the oil subsidy is for the government. “It is a political decision which has economic implication. It is not a matter of good and bad.”
The state-owned energy company is absorbing unbudgeted monthly losses of between N100 billion and N120 billion on Nigeria’s average daily consumption of around 60 million litres of gasoline, the firm’s Group Managing Director, Mele Kyari, said at a media briefing on March 25