OPEC Production Cut will affect Nigeria, Says FSDH

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The crude oil production cut agreed by members of the Organisation of Petroleum Exporting Countries (OPEC) to rebalance the market could pose more challenge challenging for Nigeria and other oil exporters, analysts at FSDH Merchant Bank have stated.

The financial institution stated this in its latest macroeconomic review for the second quarter and 2020 outlook.

OPEC recently agreed a 23 per cent production cut to address the supply glut and rebalance the oil market. A significant number of the large oil producers had a high compliance rate – Saudi, UAE and Kuwait recorded a 100 per cent compliance rate.

Nigeria was expected to cut 417,000 barrels per day with target production at 1.41 million barrels per day (mbpd).

However, production in May was estimated at 1.48mbpd suggesting a compliance rate of 95 per cent.

“With relatively lower oil prices as a result of COVID-19, oil exporting countries are expected to suffer revenue loss and exchange rate pressures in 2020. In addition, OPEC cuts which were implemented to rebalance the market could make the situation challenging for oil exporters,” FSDH stated in the report.

According to data from OPEC, Angola’s output declined by 4.4 per cent to 1.34 million barrels per day (mbpd) in May, from 1.4mbpd in March.

Also, in Nigeria, output declined by 3.7 per cent to 1.78mbpd in April from 1.844 in March, while Gabon experienced a 4.46 per cent production decline during the period.
“In May, Nigeria implemented close to a 350,000 b/d production cut following the OPEC agreement to reduce output. This will have huge implications on government revenues, fiscal deficits and current account balance,” the report added.

National budgets and their benchmarks have been being reviewed in Nigeria, Angola and Gabon.

Therefore, the Lagos-based financial institution pointed out that with lower revenue, fiscal deficits were expected to increase across oil exporting countries.

It projected that in Nigeria, deficit as a percentage of GDP was projected to exceed the stipulated three per cent in the Fiscal Responsibility Act and that current accounts would also face pressure in 2020.

“Fall in crude oil price triggered by lower demand will negatively government revenues and forex inflows.

“Crude oil output will fall below the initial budgetary target of two million barrels per day. State governments will struggle to meet financial obligations
“Direct implications on construction industry, cement industry, consumer spending, etc,” it stated.

In 2019, net FAAC allocations to the 36 states of the federation and the FCT totaled N2.47 trillion. In the first quarter of 2020, allocations to state governments stood at N669 billion. “With the anticipated lower revenue profile as a result of COVID-19 and its impact, revenues shared among the three tiers of government is expected to decline in the year.

“According to the Minister of Finance, Budget and National Planning, FAAC receipts must average at least N650 billion for the Federal and state governments to meet their current obligations.

“Given this, many state governments will experience difficulty in financing their budgets especially given the expected decline in FAAC allocations and Internally Generated Revenue (IGR) following the stifled economic activities as a result of lockdown and other restrictions,” it added.

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