How ready is Nigeria to handle possible crash in global oil demand in 2020
Last week, the International Energy Agency (IEA) predicted that global oil demand may crash by 730,000 barrels per day in 2020 from 99.1 million barrels per day before the outbreak of coronavirus with its attendant effects on global trade. Considering Nigeria’s current budget estimates of 2.3 million barrels per day and $57 per barrel, how ready and realistic is the country cope with a possible crash in global oil demand. OLATUNDE DODONDAWA writes.
THE International Energy Agency (IEA) said in a report on Monday that in a worst-case scenario, if the coronavirus continues to spread globally and China’s need for oil remains subdued, global oil demand could fall by as much as 730,000 barrels a day in 2020.
The report is in response to the COVID-19 which is fast becoming an official pandemic and oil prices plunging amidst a global price war.
The agency said its base case is for a slump in demand of around 90,000 barrels a day, assuming that the situation in China improves in the second quarter.
“While the situation remains fluid, we expect global oil demand to fall in 2020, the first full-year decline in more than a decade, because of the deep contraction in China, which accounted for more than 80 per cent of global oil demand growth in 2019, and major disruptions to travel and trade,” the IEA said in its March oil market report.
The Organisation for Economic Cooperation and Development (OECD) expects the coronavirus outbreak to slash world economic growth this year to its weakest level since 2009. It was in 2009 that the fallout from the global financial crisis threw the economy into recession.
The coronavirus pandemic has now infected more than 108,000 people globally and killed more than 3,800. An increase in measures to contain the virus outside China, including travel restrictions within Italy, is hammering stocks and intensifying fears of a recession.
The IEA Oil 2020 report said that the “visible decline in transport, industrial and commercial activity” points to a drop in global oil demand of 2.5 million barrels a day for the first quarter, compared to the same quarter last year. Of that, China would account for 1.8 million barrels a day.
“The immediate outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity,” the IEA said.
Despite the crash in oil price, Saudi Aramco said it would increase production to 12.3 million barrels per day. Output will be 300,000 barrels per day over the company’s maximum sustained capacity of 12 mbpd in April. The move marks a major escalation in the price war.
Expressing his frustration to declining global crude oil demand, the Minister of State for Petroleum Resources, Chief Timipre Sylva, said that the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC states like Russia, might need to meet again to reconsider production cuts and end the new oil war initiated by Saudi Arabia and Russia.
Sylva said that the sharp drop in the price of Brent crude, which fell as much as $30 per barrel last week, could force a change in tactics. Saudi Arabia and Russia have pledged to ramp up production despite substantially weakened global demand, having failed to come to an agreement on supply cuts.
Nigeria may be worse hit as the global oil war rages and crude price hovers around $30 per barrel which is almost half of benchmark of $57 per barrel in Nigeria’s 2020 budget.
About 50 cargoes of Nigeria’s crude oil are currently stranded as there are no off-takers for them due to drop in demand, following the Coronavirus pandemic.
The Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, however called on government at all levels, captains of Industries and the organized private sectors to brace up for the new low regime of global crude oil prices and that realistic estimates must be made to reflect the current realities of the crude oil market.
“Today, I can share with you that there are over 12 stranded Liquefied Natural Gas (LNG) cargoes in the market globally. It has never happened before. LNG cargoes that are stranded with no hope of being purchased because there is abrupt collapse in demand associated with the outbreak of coronavirus,” Kyari said.
The GMD said the NNPC was working round the clock to increase the countries daily production to 3million barrels per day and shore up the crude oil reserves to 40billion barrels.
In response to the IEA Oil 2020 report Kelly Trout, senior research analyst at Oil Change International, said the report should come with a warning label as an unfit guide to the climate change emergency.
Trout said: “The IEA ignores the reality that tackling the climate crisis will require a fundamental transformation of energy markets and the managed decline of fossil fuel production and use within this decade. Rather than anticipate continued growth in oil demand, the IEA should be providing governments with a roadmap for shifting their economies to renewable energy at the speed required to limit warming to 1.5 degrees.”
On the outlook for the US shale market in the context of volatile international oil market, Lorne Stockman, senior research analyst at Oil Change International, said “The oil price shock will claim casualties in the US shale plays, but it won’t put an end to the reckless expansion of fracking, particularly in the Permian Basin.
“While a rash of bankruptcies could slow expansion for a while, it will also trigger a fire sale of distressed assets that could lead to cheaper production in the long run. The carbon bomb that is the Permian Basin will only be diffused by policy action, rather than short-term market volatility.”