By Etuka Sunday
Nigeria’s first Professor of Capital Market, and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke has said that the $60 per barrel oil price benchmark of the 2019 Budget is unrealistic.
Prof. Uwaleke who is also yhe President of the Association of Capital Market Academics of Nigeria, said, “a few months ago when the MTEF 2019-2021 was still in the works, this fundamental assumption seemed realistic. As a matter of fact, international crude oil price averaged US$75 per barrel in the third quarter of 2018 according to the Ministry of Petroleum Resources. So, it made sense to use US$60 per barrel at the time. But, that was then.
“The stark reality today is that developments in the international oil market already suggest an outlook that is full of uncertainties regarding the crude oil price”, he said.
The University Don said, the two international oil benchmarks namely Brent crude and the US West Texas Intermediate crude have fallen by more than 30 per cent since October 2018 chiefly on the back of rising supply.
“Brent fell below US$60 per barrel on November 23, a threshold not breached in over a year while WTI also saw a significant collapse, almost breaking below US$50 per barrel.
“This comes as no surprise. The international crude oil market is well known for its volatility. The recent agreement by OPEC and its allies to cut production by 1.2 million barrels per day starting in January 2019 has done little to halt the decline in oil price.
“Further, the present uncertainties surrounding the global economy could have adverse effects on crude oil price. In its latest World Economic Outlook, the IMF downgraded global economic growth to 3.7 per cent for 2018 and 2019, 0.2 per cent lower for both years than had been forecast earlier”, he said.
He pointed out that, the US-China frosty trade relations remain a key risk to global growth. Worse still, a lack of clarity about the recent U.S.-China trade truce, announced a few weeks ago by the Trump administration, is contributing to global uncertainties.
“Already, the term structure of interest rates is generating increasing fears about the growth outlook for the US economy following the fall of the yield on the 5-year Treasury note below that of the 2-year note, a development that suggests investors are worried about the US economy’s longer-term health.
“Historically, inversions of the yield curve have preceded economic recessions in the United States. It is the same story in the UK and many other parts of the world. Without any doubt, global economic slowdown will have far-reaching implications for the demand for Nigeria’s crude oil given that the Euro zone and the US account for a significant proportion of the country’s crude oil exports”, he said.
On the supply side, he said, ‘there is equally the threat of oil glut in spite of the OPEC+ output cut agreement especially with the recent announcement by the US that it had become a net oil exporter.
“As noted by Citibank, US output has recently risen to an estimated 11.7 million bpd making the United States the world’s biggest crude oil producer.
“In its energy forecast, Citibank sees Brent crude trading within the range of US$55 to US$65 a barrel in 2019 which could drop to as low as US$40 per barrel in the event that the OPEC+ production cut agreement fails.
“It is instructive to note that Russia, a major oil producer, predicated its budget for 2018/2019 on US$40 per barrel.
“Against this backdrop, what has become clear is that the US$60 per barrel oil price benchmark for the 2019 budget is rather ambitious. Based on the forecast by Citibank, the lower limit of US$55 per barrel could be considered.
“Indeed, the current global economic headwinds and other downside risks to oil price underscore the need to be conservative in the estimation of benchmark oil price. An overly high benchmark that fails to crystallize will make the 2019 budget very difficult to implement.
“When this happens, it is usually the capital component that is sacrificed which will weigh on key targets including the 2019 GDP growth forecast of 3.01 per cent.
“Therefore, it is necessary to avoid engaging in acts that could necessitate spending cuts in the middle of a possible slump in crude oil price that will severely hurt the current efforts at economic recovery and growth”, he said.