International prices of crude oil spiked yesterday, raising hopes in the country that Nigeria could meet its financial obligations to its citizens and fulfil its global commitments in the short term as the Brent sold for $34.42 per barrel.
With dwindling prices of the country’s major revenue earner in the last few weeks, the federal government had had to realign its 2020 budget in the face of current economic realities which have seen the price fall from close to $60 per barrel to just about $20.
But yesterday, the price of crude oil spiked, gaining as much as 15 per cent in just few hours, with increasing reports that members of Organisation of Petroleum Exporting Countries (OPEC) and their allies would be holding a virtual meeting to discuss an end to the price war, mainly between Russia and Saudi Arabia.
Consequently, the oil market, which was already experiencing a glut, saw prices crash to an 18-year low in March as the two countries engaged in a price war after Russia declined to join OPEC in deepening production cuts, prompting Saudi Arabia to lower prices and increase output.
The country’s financial projections for the year were also compounded by the impact of the COVID-19 pandemic, which has led to the international buyers of the country’s crude oil cutting down on their purchase and consumption, leaving Nigeria’s crude stranded at sea.
But as the prices began to tumble, the Muhammadu Buhari-led government announced some significant changes to its 2020 budget as measures to contain the effect of the outbreak of coronavirus on the nation’s economy.
It outlined a plan to implement a 50 per cent cut in revenue from privatisation proceeds and a review in crude oil benchmark price down to $30, while crude oil production, but kept daily production at 2.18m barrels per day.
With an initial oil benchmark of $57 per barrel in the 2020 budget, the Federal Executive Council was also forced to approve reductions in capital budget by 20 per cent, and 25 per cent cut in recurrent expenditure.
The federal government also adjusted downwards Customs revenue of N1.5 trillion, in anticipation of a significant reduction in economic activities, cut down capital expenditure by 20 per cent across ministries, departments and agencies and also a 25 per cent cut of all government owned enterprises.
However, the upswing in the price of crude oil which started on Thursday continued yesterday with Brent crude oil, the international benchmark, climbing as much as 15 percent to $34.42 per barrel while West Texas Intermediate crude oil, the U.S. benchmark, gained as much as 12 percent to $28.31.
Reports indicate OPEC will meet with Russia and other oil producers in the hope of agreeing supply cuts and ending a brutal price war on Monday. The meeting, called by Saudi Arabia, will be held via video conference and will include oil producers from outside the OPEC+ alliance that includes Russia and a few other countries, two senior sources at the OPEC secretariat told the press.
The final list of invitees has not yet been set, they said. The United States, United Kingdom, Canada and Mexico could be invited, according to reports.
The meeting comes after US President, Mr Donald Trump suggested that massive production cuts could be on the way and Saudi Arabia called for an "urgent" effort to restore "balance" to the oil market.
US oil prices soared 25% — their biggest one-day gain on record — on Thursday after Trump tweeted that he hopes and expects Saudi Arabia and Russia will slash output by between 10 million and 15 million barrels per day.
Prices continued to advance Friday, recovering some of the massive plunge seen over the past month.
Brent crude futures, the world's benchmark, were trading more than 9% higher at $32.77 a barrel.
Saudi Arabia and Russia have been locked in an epic price war since early March when the OPEC+ alliance cracked, flooding the oil market with cheap crude just as demand craters because of the coronavirus pandemic. Crude had crashed to 18-year lows, crushing American oil companies and energy stocks.
Russia and Saudi Arabia started the feud when the coronavirus was thought to be a "brief health scare," Mr. Stephen Innes, chief global markets strategist at AxiCorp said in a note. Now that it is morphing into one of the most severe hits to the economy since the Great Depression, "there's going to be a change of heart," he added.
While news of the meeting will support oil prices, likely averting a slide to single-digits and easing the huge pressure on storage facilities, "whatever cuts are agreed will not likely be sufficient to address the near/medium term oversupply," Innes said.