Oil prices jumped on Thursday after United States President Donald Trump said he expected Saudi Arabia and Russia would agree to capping oil production, providing much reprieve to countries like Nigeria worst hit by the scramble for bigger market share among producers.
Brent, the internationally traded benchmark crude, traded at $33.44, up $8.70 a barrel at a point, while the US grade WTI sold for $25.58, up 25.95 percent. Both have now settled slightly lower in US trading.
Brent had fallen over 50 percent since January with the coronavirus-driven lockdowns in China, Europe and the United States leading to fallen oil demand.
Trump said he expects Saudi Arabia and Russia to cut oil production by about 10 million to 15 million barrels, but he didn’t specify whether the production cut would be per day.
While there has not been confirmation from either Russia or Saudi Arabia, the scintilla of hope offered for the possibility of a truce was enough to send prices up. Saudi Arabia is now calling for an “urgent meeting” of the Organisa
tion of Petroleum Exporting Countries plus Russia and other unnamed countries.
The global oil price crash is setting up a bleak second quarter for many nations including countries like Nigeria whose economies are heavily dependent on oil receipts. Nigeria is particularly vulnerable. Its fiscal and monetary buffers are nonexistent today and it does not have capacity to join in the dog fight for market share following years of neglect and huge capital flight away from its oil industry.
So this comes as cheering news for Nigeria, already feeling the squeeze by the price war and the outbreak of coronavirus. Nigeria has offered its biggest export crude grades, Qua Iboe and Bonny Light, at a discount of $3 below the benchmark, yet it was struggling to find buyers for its April cargoes.
With lower oil revenue, the economy is reeling, squeezing resources to fight the pandemic and keep government0 functioning. The Federal Government has almost exhausted the excess crude account and external reserves have fallen below $36 billion, touching its lowest levels in 30 months.
This complicates the task of the Central Bank of Nigeria which is trying to resuscitate the economy. It had devalued the naira leaving official exchange rate at N360/$1 and it would change at N380 per dollar at the Investors and Exporters (I&E) forex window.
The Federal Government has also reviewed downward the benchmark price of crude oil and cut 20 per cent recurrent and capital expenditure of the budget to assuage fallen oil incomes.
If the agreements stick and output caps are restored, Nigeria will have resources to combat COVID-19, pay government workers and restart the economy after the pandemic is over.
The outsized nature of Nigeria’s government means that dwindling revenue has dire consequences for the economy as government’s inability to finance critical projects and make budgetary disbursement would shrink the economy and crimp private enterprises who rely on government contracts.
“The market is hoping that this US intervention will bring us closer to an agreement between Saudi and Russia in cutting production,” said CMC Markets analyst Margaret Yang, adding that bargain hunting is also lifting oil prices.
Neil Wilson, chief market analyst at Markets.com, believes that talk of a truce in the oil price/supply war is lifting sentiment, but he “cannot help but sense a dead cat bounce”.
“Trump always claims he is close to a deal,” said Wilson, in a morning note. “From what we can glean from the chatter, Russia is not raising output but the Saudis are not backing off and have increased output to record levels.”
Trump also said he had invited American oil executives to the White House to discuss revival measures which would aid the oil industry that is hurt by a slump in demand due to both the coronavirus outbreak and the price war.
The oil strategy meeting would include CEOS from Exxon, Chevron, Occidental Petroleum, Devon Energy, Phillips 66, Energy Transfer Partners and former Continental Resources CEO Harold Hamm, according to CNBC. The collapse in prices has threatened the once-booming US drilling industry with bankruptcies and significant layoffs and Washington has scrambled for ways to protect the sector.
With markets facing 15 million barrels per day (bpd) of oversupply in the second quarter and storage maxing out in April, extraordinary curtailments of oil supply will be needed in May and June, said Kang Wu, head of Asia analytics at S&P Global Platts. Saudi Arabia supports cooperation between oil producers to stabilise the market but Russia’s opposition to a proposal last month to deepen supply cuts has caused market turmoil, a senior Gulf source familiar with Saudi thinking told Reuters.
The Kingdom of Saudi Arabia raised its oil production to its maximum level on Wednesday: above 12 million barrels per day. The world’s biggest oil exporter supports a deal for stabilisation, but production cuts would have to be shared among all oil producers, including Russia.
The Trump administration is pursuing several avenues to convince Riyadh and Moscow to back down from the price war.
Speaking at a government meeting on Wednesday, Russia’s President Vladimir Putin said that both oil producers and consumers should find a solution that would improve the “challenging” situation of global oil markets.
Goldman sees around 20 million barrels a day flowing into storage in April, while IHS Markit expects the world will run out of space to store oil by the middle of the year.