NIGERIA OIL: Brent Fall Below Production Cost Signals Darker Days

• Oil prices have continued their downward trend, with Brent crude slipping below its average unit cost of output of c.US$23.
• Nigeria has deliveries of unsold oil with no buyers in sight, forcing the country to sell at a discount. Qua Iboe and Bonny light, two of its finest grade were trading at a pale US$12/bbl as at the end of last week.
• Nigeria seems to be facing its worst fiscal position in many years. Before the sharp downturn in oil prices, Federation Account Allocation Committee (FAAC) revenues were already declining.

News broke out on Monday that May WTI contract prices had fallen into negative territory as traders sold off their positions in order to reduce storage costs associated with physical supply in the midst of rising demand. Oil prices continued their downward trend, with Brent crude slipping below its average unit cost of output of c. US$23.

To complicate matters worse, it is claimed that Nigeria has deliveries 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 grade 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.

READ ALSO: Coronavirus: Nigeria Could Lose $19 Billion in Oil Revenue in Q1 2020

The nation seems to be facing its worst fiscal position in many years. Before the sharp downturn in oil prices, Federation Account Allocation Committee (FAAC) revenues were already declining.

This is expected to worsen this quarter as the country struggles with the burden of unsold cargo, dropping rates, and a halt in economic activity due to the coronavirus outbreak with its negative effects on tax revenue collection.

We note that before the lockdown started the FIRS reported a tax collection shortfall of N282.1bn in January. Many states depend almost entirely on revenue from the FAAC to meet payment obligations. A rapid fall in FAAC revenue as expected in this quarter will contribute to a return to the recession period where most states were unable to pay salaries.

At a crucial period such as this, when some oil grades already tend to cost less than water, policymakers need to go back to the drawing board and recalibrate their strategy in order to avert an unforeseen crisis. They must introduce a strong diversification strategy to save both the country’s short and long-term fiscal positions.