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Following the observed steady drop in global oil prices, the Managing Director of Financial Derivatives Company Limited, Mr. Bismarck Rewane, has called on the federal government to begin a paradigm shift with downward review of the planned $65 oil benchmark for 2019 appropriation bill.
This is coming after oil prices steadied on Monday after plunging nearly 8 percent in the previous session, but remain under pressure with Brent crude below $60 per barrel amid weak fundamentals and struggling financial markets.
Front-month Brent crude oil futures LCOc1 were at $59.23 per barrel at 0202 GMT, up 43 cents, or 0.7 percent, from their last close. U.S. West Texas Intermediate (WTI) crude futures CLc1, were up 11 cents, or 0.2 percent, at $50.53 per barrel. The gains did little to make up for Friday’s selloff, which traders have already dubbed ‘Black Friday’. Reacting to Friday’s falls in Brent and WTI, China’s Shanghai crude futures on Monday ISCcv1 fell by 5 percent, hitting their daily downside-limit. Greg McKenna, an Australian-based independent financial analyst, said there had been an “utter capitulation in crude oil” market.
The downward pressure comes from surging supply and a slowdown in demand growth which is expected to result in an oil supply overhang in 2019. Oil markets are also being affected by a downturn in wider financial markets. “2018 clearly marked the end of the 10-year Asia credit bull market due to tightening financial conditions in Asia (especially China), and we expect this to remain the case in 2019,” Morgan Stanley said in a note released on Sunday.
Apart from toning down the benchmark, Rewane opined that there is also need to revise spending by possibly deferring some projects to tame trade surplus and high pressure on the external reserves from next year.
Currently, Nigeria’s foreign reserves, which rose to a high of $47.865bn on May 10, fell to $41.52bn as of November 22, according to figures from the Central Bank of Nigeria (CBN).
Giving further insights on the challenges coming with falling oil prices, Rewane averred that “If you increase the restrictions, then you increase the premium on the currency. The adjustments are not easy and you cannot do that before an election. But if you have to do it, you have to do it. Even at $58, you can still get by but it is quite imminent that you have to make some adjustments.”
While stressing that time has come for the government to sensitise the country to the fact that “our external imbalances are going to increase and that we might be heading towards some problems,” the financial market pundit said “This is what we have been talking about: that we need to deal with the structural rigidities in the system to allow for adjustments”.
“When the price was going up, we should have seen that adjustment to ensure that things get better. But when the price went up, things did not get better. Now the price is going down, things are going to get worse,” Rewane added.
Corroborating Financial Derivatives boss views, the Director-General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, noted that drop in oil price drop would lead to sharp declines in government revenue and foreign exchange earnings which will weaken capital project financing.
The Don made it clear that “You cannot rely on a commodity whose price you don’t control. We should see oil revenue as a windfall, not to rely on it. It is not reliable at all because oil price fluctuates; so we are vulnerable to this negative oil shock, and people have been saying it for long that we need to get out of it.
“But once the oil price starts going up, we relax. The price decline should be a major source of concern because the economy depends heavily on oil. We need to diversify away from oil.”
Several development economists who spoke with our correspondents on the oil price shocks agreed that the national economic team needs to make structural reviews and needed adjustments before the economy is caught napping again.