Oversupply in the crude oil market caused by increased production by the United States and Russia, yesterday forced a drop in the price of crude to a 14-month low, threatening the implementation of Nigeria’s 2019 budget to be presented to the National Assembly today by President Muhammadu Buhari.
Apart from the forecasts of record US and Russian crude oil output, a sharp sell-off in stock markets as the outlook for global growth deteriorated, has also impacted on the global oil market.
While the US crude oil, West Texas Intermediate (WTI), dropped $2.04, or 4.1 per cent, to a low of $47.84, its weakest since September 2017, the North Sea Brent lost $2.41, or 4.0 per cent, to $57.20, representing a 14-month low.
However, before the end of the trading, WTI recovered to around $49.28, while Brent last traded around $59.01.
With oil price at $80 during the period of the preparation of the 2019 budget, the federal government had ignored the $50 per barrel oil price benchmark proposed in the Economic Recovery Growth Plan (ERGP), and proposed a $60 per barrel oil price for the budget.
Though Nigeria’s daily output was about 1.9 million barrels per day, the federal government also predicated the budget on the 2.3 million barrels per day.
Also N305 was proposed as exchange rate to the dollar, with government planning also to work to keep inflation down after slight increases in the last two months on the heels of 18 months consecutive decline.
However, the Minister of Budget and National Planning, Senator Udoma Udo Udoma, had said the federal government was considering a leaner 2019 budget of N8.6 trillion, against the N9.1 trillion approved by lawmakers for 2018.
But with the drop of oil price from $86 per barrel in October to $58 per barrel, the implementation of the budget is increasingly under the threat.
Both oil benchmarks have shed more than 30 per cent since early October due to swelling global inventories.
The Organisation of the Petroleum Exporting Countries (OPEC) and other oil producers agreed this month to curb production by 1.2 million barrels per day (bpd), equivalent to more than one per cent of global demand, in an attempt to drain tanks and boost prices.
But the cuts won’t happen until next month and meanwhile production has been at or near record highs in the US, Russia and Saudi Arabia, undermining spot prices.
Russian oil output hit a record 11.42 million bpd this month, an industry source told Reuters.
Oil production from seven major US shale basins is by the year-end expected to climb to more than eight million bpd for the first time, the US Energy Information Administration said.
Inventories at the US storage hub of Cushing, Oklahoma, delivery point for the oil futures contract, rose more than 1 million barrels from December 11 to 14, traders said.
The US has surpassed Russia and Saudi Arabia as the world’s biggest oil producer, with total crude output climbing to a record 11.7 million bpd.
With prices falling, unprofitable shale producers will eventually stop operating and cut supply, but that could take some time, and meanwhile inventories keep growing.
Reuters also reported that the world stock markets tumbled yesterday as fears about a slowing global economy gripped investors, just as the US Federal Reserve looked set this week to deliver its fourth interest-rate hike of the year.
Investors confidence is deteriorating with more fund managers expecting global growth to weaken over the next 12 months, the worst outlook in a decade, Bank of America Merrill Lynch’s December investor survey showed.