Looking at development in the international oil market, Nigeria may be heading for another difficult time from external shock. This time, the impact on the economy may be worse than the impact the 2008 global financial crisis had on it. Oil prices are tumbling and traditional importers of crude oil are either finding alternatives or are over supplied. Nigeria economy may face very difficult time in the next two or so years.
What are the various arms of government doing about this? The sovereign wealth fund that would have acted as cushion is under litigation? Last month in this column “Hear these bickering Governors” we warned the nation that more oil discoveries are being made across the globe and that the US is developing its internal oil reserves to reduce its dependence on imported fuel. It is already happening.
Nigeria has over the years come to depend on crude oil export for its revenue that is shared among the three ties of government. Only last week Tuesday, the Central Bank of Nigeria Monetary policy Committee raised alarm over the deteriorating national economic growth stating that “The growth and development of the Nigeria economy will continue to be at risk so long as progress is not made in structural reforms.’’ The committee also warned that “The proposed upward review of electricity and import tariffs on wheat and rice as well as the rising global food and energy prices could further put upward pressure on prices in the near-term”.
Provisional data from the National Bureau of Statistics indicates that real GDP in the first quarter of 2012 grew by 6.17 per cent down from 7.68 per cent in the fourth quarter of 2011 and 7.13 per cent in the corresponding period last year. The real GDP growth for fiscal 2012 is projected at 6.5 per cent down from 7.45per cent in 2011. This confirms a disturbing and uninterrupted trend of decline going back to Q1 2010.
Crude oil production was estimated to have declined by 2.32 per cent in quarter one 2012 compared with the decline of 2.41 per cent in the corresponding period of 2011. Non oil real GDP growth estimated at 7.93 per cent in Q1 of 2012 was much lower than 8.73 per cent recorded in Q1 of 2011.’’ Growth in agriculture in the first quarter of 2012 also declined to 4.15 per cent compared with 5.54 per cent in Q1 of 2011 and 5.74 in fourth quarter 2011. In general, the paradox of rising poverty incidence in the face of impressive economic growth further reinforces the call for the implementation of appropriate structural reforms in the key sectors notably agriculture, power and the petroleum sector to stimulate productivity
What does this imply for the average Nigeria? In a period when oil prices are high, the economy is struggling, what then happens when oil prices fall below the budget bench mark, many states, local government and even the federal government will find it difficult to pay salary not to talk of embarking on development projects. Poverty which is staring the nation in the face will worsen. Every Nigerian must learn to save now, do not spend that extra cash in your hands, the rains are here and it seems it is too late to save for the rainy day. But Nigeria policy makers are not addressing their minds to this trend and development in the oil market. Instead they are politicking with creation of more states as cost center. From where will these new states if created be financed?
Equally saddening is the fact that the nation’s leading politicians instead of facing governance are busy scheming for who become president in 2015. Nigerians are more at home with who ever will put food on their table, ensure their children attend good schools, and provide health care, security of property and lives. The only way to achieve this is when there are resources to carry out governance. For too long successive governments have paid lip service to the transformation of the nation’s economy, yet 52 years after independence the nation’s economy is at risk as a result of the vagaries of the international oil market.
Oil market reports last week indicated that Europe is facing a glut of high quality crude oil grades, only a year after war in Libya created a serious shortage. Continental Europe faced with sovereign debt crisis its demand for oil has fallen and the United States has cut imports due to greater availability of domestic supply. This development has led to a steep weakening in values for much high quality sweet and low-sulphur grades in a rare market development potentially suggesting oil futures prices have scope to correct yet lower in a much oversupplied market.
Oil prices have come down, refining margins have improved but it is still a terribly bleak picture for me. I’m struggling to sell in Europe, the U.S. has cut barrels and it is only Asia which regularly saves (us) from a steeper fall, a major trader in sweet grades in Europe was quoted by Reuters as saying. Physical crude grades are priced via differentials versus benchmark dated Brent and these diffs – as they are known in the industry jargon – have sunk over the past weeks to the lowest level in years on the Mediterranean sweet grade market. For instance, Algeria’s light sweet Saharan Blend BFO-SAH fell to a seven-year lows and Kazakhstan’s CPC Blend BFO-CPC hit a two-year low by mid-May.
Libyan grades have been trading at large discounts to their official selling prices (OSP) and even the market favourite – super high quality Azeri Light – has fallen steeply BFO-AZR. Traders cite multiple reasons for the drops. Prominent among them is the return to the market of the much missed 1.3 million barrels per day (bpd) of Libyan crude, which dramatically changed the picture from last year, when consuming nations released 60 million barrels of strategic stockpiles.
Second is an overhang of West African crude as the United States, a significant buyer of Nigerian and Algerian grades, is becoming increasingly reliant on new domestic production of sweet crude from its shale reserves in North Dakota and Texas. Those are estimated to have produced 1.2 million bpd in April. U.S. imports of Algerian crude are on a steep downward trend from a high of 827,000 bpd in 2007. Imports in February this year were 256,000 bpd, down from the 2011 average of 358,000 bpd, according to U.S. Energy Information Administration data.
Imports of Iraqi crude are shrinking but at a slower rate. February imports were 271,000 bpd, nearly a one-year low, far below the average for the last four years of 480,000 bpd, EIA data showed. U.S. imports from Africa and the Middle East will fall even further in the months to come owing to the reversal of the Seaway pipeline, which unlocked a crude supply glut in the U.S. mid-continent for Gulf Coast refiners. Seaway’s initial flows will be 150,000 barrels per day, expected to rise to 400,000 barrels per day. BP was already offered two 500,000 pipeline cargoes of U.S. sweet crude from Cushing, Oklahoma, just prior to the pipelines reopening. With the U.S. domestic production rising, we are seeing the arbitrage drying up, a trader in West African crude said. U.S. data shows oil imports from Nigeria fell to 352,000 bpd in February, the lowest since December 1996, compared with 948,000 bpd a year earlier.
In late April, differentials for Nigeria’s Qua Iboe grade BFO-QUA hit multi-month lows as traders cited slack U.S. demand. The picture will be however different in June as a plunge in Brent futures has prompted traders to take more Basra Light into Europe to capture a price advantage. Bickering governors and oil thieves, now that the chickens have come home to roast which way for Nigeria?