Crude oil price crashed below $30 on Sunday evening’s market-opening after Saudi Arabia launched a price war in reaction to Russia’s decision not to cut output. This represents a 30% drop in one day – the worst trading day since the thirties and the lowest price in four years.
Oil Benchmark: Brent Crude Oil, which Nigeria’s 2020 budget is benchmarked against, fell from $45 per barrel to $31.52 as at the time of writing this article. The oil price crash is still an unraveling situation and could get worse as markets react. Stock markets are likely to continue its sharp fall during the week as the raging coronavirus heightens uncertainty amidst the oil price war started by Russia and Saudi Arabia.
Why the crash: The crash started over the weekend after Russia refused to bow to OPEC’s pressure for a cut in crude oil output. OPEC believes that by cutting supplies, it will force prices to rise. This is a move that has been used in the past to support crude oil prices from falling below OPEC’s target price. However, Russia wasn’t having any of it.
The Russians believe that a higher oil price supports investment US-led shale oil production further eroding any gains they may have obtained by a cut in supplies. The Americans have risen to the top of oil producers in the world since they started producing oil through shale oil in 2013. The US was a major destination of Nigeria’s Bonny Light crude but has since seen its demand from Africa’s largest economy drop to nearly zero.
The Russians, backed by their oil producers, believe a price war is the only solution to curtailing the rise and spread of Shale oil. They are also not happy with the increasing reliance on sanctions by the Trump-led administration to move against countries like Russia and China. The spread of the Coronavirus, which has also negatively affected supply chain and manufacturing in China and Europe, has cut demand for oil around the world.
What this means: This is a very dire situation for Nigeria. With crude oil prices crashing and financial markets nose-diving, demand for Nigeria’s oil will wane while future deals will close at a price much lower than Nigeria’s crude oil benchmark.
There are also fears from some circles that the prices could fall below $30 a psychological floor thought to be a trigger from a devaluation. Nigeria’s CBN has kept the exchange rate at the Investor & Exporter window at M360/$1 since 2017 when it last devalued.
Be Smart: Investors have exited the stock market in droves, fearing a global contagion could cause a flight to safety from foreign portfolio investors and trigger even more sell-offs. History also suggests now might be the time to rebalance portfolios and possibly hold a basket of currencies. It may also be wise to front-load costs and investments while major investment decisions and deals may have to be reviewed especially if it is linked to the exchange rate.