Brent crude rallies to $32 • Anxiety as MPC meets; devaluation, survival on the burner
ALTHOUGH the price of oil may at present be as low as $22 per barrel, the Minister of State for Petroleum Resources, Ibe Kachikwu, says Nigeria’s case is not hopeless.
He says Nigeria would still make profit even if oil drops to $20 as cost of producing a barrel of crude oil has been put at an average of $13 per barrel onshore.
Lower outputs from Nigeria, Iraq and Saudi Arabia may have slashed the crude oil export of the Organisation of Petroleum Exporting Countries (OPEC) in December, even as the cartel’s daily basket of 13 grades fell to $22.9 a barrel yesterday.
Meanwhile, with major economic indicators for the country at its record low and the investment environment tense, stakeholders in the financial sector are awaiting far-reaching decisions on the economy by the Monetary Policy Committee (MPC) from today.
Besides, MPC, the policy making body of the Central Bank of Nigeria (CBN), having on hand the naira exchange rate challenge, reserves at low level, rising inflation and widening budget deficit, must come out with a policy that will complement the current fiscal plans of the Federal Government.
The cheap oil price is, therefore, raising concerns that the shale oil production in the United States (U.S.) may be relatively unsustainable at a production cost of about $70 per barrel.
The official benchmark, Brent rallied to $32 a barrel as the prospects of new central bank stimulus and an upcoming snowstorm in the U.S. boosted expectations for fuel demand.
The OPEC basket represents the average crude price of the member grades, and has been lower on a free fall against the Brent, reaching a 13-year low.
Kachikwu, according to Bloomberg, said Nigeria had not “suffered too badly in terms of investments, as most of the projects we have are still on track.
“The deep off-shore projects, obviously we are putting on hold, given the fact that the returns on those, would not match the prices today.”
Speaking in Davos, Switzerland, Kachikwu said: “Everybody is sort of coming back on land so this is time to put a lot of investments on ground, put a lot of incentives on ground, make everybody return on ground, where in fact our average cost of production is about $13 per barrel.
“So we need more on that, bringing those numbers down from $13 to somewhere $10. Obviously we won’t get the Saudi figures of about $6 or $7, but we can get it much lower,” he said.
OPEC said persistently low prices would finally begin to bite hard on shale oil rival producers in 2016, forcing the U.S. and Canada to cut back production.
The Executive Director, Corporate Finance, BGL Capital Limited, Femi Ademola , said the market would naturally switch into a cautious mood immediately the meeting begins.
This is because with the condition of the economy, the credit system and rising pressure to devalue the currency, both the local and foreign investors would want to see the end of the meeting before staking more.
“Some are arguing that the interest rate should go down further and others are concerned about the naira exchange. So, there is uncertainty and the market would slow down, awaiting the decision.
“If the rate goes down, it will help the equities market, but if it goes up, the bond market will have it. But the market will not want to preempt the committee. Some people will still buy, but activities will remain low, marked by cautious decisions,” he said.
A top bank chief had told The Guardian that “the meeting is not for small and medium enterprises discussion. It is not about the real sector. It is not even about banks. It is for the economy as a whole, because there is one issue that has overarching influence on all now – the country’s sustainability.
“We don’t have savings to fall back on and our means of earnings is ebbing. We cannot transact freely due to foreign exchange scarcity, while general prices are gradually hitting the roof. Surely, the market’s expectations of drastic decisions are not misplaced,” he said.
But the renewed expectations, besides the economic realities on ground, were heightened as the Vice President, Prof. Yemi Osinbajo, at the World Economic Forum in Davos, Switzerland, said: “We know that the Central Bank of Nigeria (CBN) will just have to do the right thing at this time. The bank has told us, and it was announced even in the President’s budget speech, that they intend to take a flexible approach and deploy whatever tools are necessary to ensure that we stay competitive.”
The Finance Minister, Mrs. Kemi Adeosun, at the same event, also said: “We have a completely independent Central Bank. They have a Monetary Policy Committee. We’re waiting to see what they’ll do.”
The minister said that Nigeria planned to borrow up to $5 billion from multiple sources, including the Eurobond market, to plug the widening budget deficit, as crude oil prices had fallen in the last few days to 2003 levels at about $27 a barrel, while the 2016 budget was based on $38 per barrel.
Nigeria’s currency has been hit by the foreign exchange scarcity and speculations to a record low of N300 per dollar on the parallel market last week, compared with the official rate of N197, a development that spurred calls for devaluation and suspicion that this meeting might be the opportunity.
A fortnight ago, the CBN had suddenly announced the end of its dollar intervention in BDC segment, after it had earlier in December 2015, unveiled a new guideline for their operations, which served as false hope to the operators.
The Managing Director of Afrinvest Securities Limited, Ike Chioke, while expressing optimism on the rebound of the economy, said this could only be achieved with strategic decisions from both the fiscal and monetary authorities.
According to him, the banking sector will be facing more challenges through weaker margins with the end of commission on turnover and faltering non-interest revenue, low oil prices, devaluation threats and its implications for capital and asset quality.
“The banks are the toll gates of the economy. When the economy does well, the banks collect higher toll and vice versa. In the recent past, there have been shifting and repositioning, which have had various effects on the industry.”
The Managing Director of Cowry Asset Management Limited, Johnson Chukwu, also told The Guardian that the market today would be tentative, as operators would be awaiting the outcome of the monetary policy meeting.
“The market is optimistic that there would be a realistic review of the exchange rate and possible adjustment to the current foreign exchange earnings capacity of the economy.”