Nigeria’s perilous times; oil glut, Naira crash

When asked recently what keeps her up at night, IMF chief Christine Lagarde cited petro-states such as Nigeria, where 90 percent of exports and 60 percent of government revenue come from oil sales. Surging on the back of this crisis is Boko Haram, which surpassed the Islamic State as the world’s deadliest terrorist group in 2014, killing 6,644 people that year.

As Nigeria’s government battles Boko Haram in the north, it also faces the possibility of renewed violence in the south in the Niger Delta, home to much of the country’s oil. At its worst, the southern insurgency there shut down half of Nigeria’s oil production. The insurgency ended with a fragile peace and amnesty for the insurgents in 2009. But the government does not have the cash to follow through on many of its promises. Now it could end up struggling against two brutal movements that could tear the country apart.

The naira traded at N310 to a dollar at the parallel market on Friday, amid expectations of an intervention by the Central Bank of Nigeria (CBN).

The Nigerian currency traded at N307 at the close of market on Thursday, showing a depreciation of one per cent.

However, it maintained N197 to the dollar at the official CBN’s window.

Traders at the market blamed the further fall in value, in spite of insinuations of an intervention at the foreign exchange market by the CBN, on demand for the greenback.

There are other oil states, not quite as challenged as Nigeria, but most of them with problems.

The answer, economists say, is to embrace structural reforms, wean economies away from national resources, and invest in other industries and human capital. That’s hard to do anytime, but especially when your country is in free fall.

In any event, the governments of oil-producing nations everywhere desperately need cash, simply to pay salaries and meet basic obligations. That means they will pump out as much oil as they can, which adds to supply and keeps prices low. Welcome to the new world of cheap oil and perilous politics.

The oil glut continues to weigh on crude prices, but the decision to stop pumping when prices fall is not as simple as it may seem.

But at $35 a barrel, roughly 3.5 million barrels a day of current global crude output costs more to pull out of the ground than it’s worth, according to Wood Mackenzie’s analysis. So why do the operators of those wells keep pumping?

At the same time that production continues to grow, global consumption is softening — in part due to an economic slowdown in China and throughout much of the developing world.

In the past, when rising surpluses pushed crude prices lower, major producers like Saudi Arabia cut back output to tighten supplies, thereby boosting prices. But as American and Canadian producers have expanded production, Middle East producers continue to pump, hoping the crash in prices will push higher-cost North American producers out of business.

So far, the strategy seems to be backfiring.

Crude oil prices leveled off at about $32 per barrel on Tuesday, after falling close to a 12-year low.

Some market watchers continue to slash their forecasts for oil prices. Last month, Standard Chartered warned its clients that crude could fall to as low as $10 a barrel this year. Others, including Wood Mackenzie, expect crude prices to recover this year to an average price of about $40 a barrel. 

Until the outlook becomes clearer, a few producers have decided to stop pumping. The biggest cuts have come from high-cost oil sands and onshore fields in Canada, older U.S. onshore projects and aging U.K. North Sea fields, according to Wood Mackenzie.

Worldwide, production continues to rise. Aside from increased Saudi production, OPEC’s second biggest producer, Iraq, plans to export a record 3.6 million barrels per day from its southern terminals next month, sources told Reuters. Iranian oil exports are also expected to rise later this year now that sanctions against that country have been lifted.

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