2019 Budget: Fears Heighten As OPEC Cuts Production Quota, Oil Price Slides

Even before the combatant National Assembly (NASS) debates and passes the budget next year, the nation’s proposed estimates of income and expenditure for next year is enmeshed in fresh fears of misalignment following a cut in Nigeria’s oil production quota by the Organisation of Petroleum Exporting Countries (OPEC) by 3.04 percent to 1.685 million barrels per day for the first half of 2019.

The development is considered as part of efforts to reduce oversupply in the global crude oil market by the Organization.

The production cut, which is to be implemented from 2019, has cast a shadow over the 2.3mbpd crude oil production assumption on which the 2019 budget is based. Nigeria expects 52.9 percent of its N8.83 trillion proposed budget to be funded by oil revenues.

Also the retention of $60 benchmark price is considered as over ambitious and unrealistic considering further sliding of the oil price at the international market, which is currently below the budget price.

President Muhammadu Buhari presented an N8.83 trillion ($28.80 billion) budget for 2019 last Wednesday, laying out plans to drive growth to a raucous parliament that highlighted divisions two months before the election.

The spending plan for Africa’s top oil producer assumes crude production of 2.3 million barrels a day, an oil price of $60 per barrel and an exchange rate of N305 to dollar.

Another disturbing signal is the Excess Crude Account (ECA), the only buffer for the country against oil revenue volatility, which fell seventy-six percent to just above $600 million in three weeks.

The Federal Government was said to have withdrawn $1.6 billion in three months, between November 25 and December 19, 2018, thereby shrinking ECA to $631 million.

Some analysts say at the weekend that these may be signs of taste of what to expect next year, even as Nigerians are experiencing low purchasing power in the midst of rising cost of food items.

OPEC and 10 non-OPEC countries agreed earlier this month to cut oil production by 1.2 million bpd effective from January for an initial period of six months to shore up what many expect to be weakening market fundamentals ahead.

Nigeria, which was exempted from the previous cuts since January 2017,was asked to join the deal during the OPEC meeting on December 7 in Vienna.

With a reference level of 1.738 million bpd, Nigeria’s oil production is to be cut by 53,000 barrels to arrive at the new quota of 1.685 million bpd, according to a breakdown of member quotas under OPEC’s supply accord released by S&P Global Platts last week.

Ibe Kachikwu, Nigeria’s junior petroleum minister, said on December 7 that it was very difficult for Nigeria to reduce its crude oil production.

Kachikwu, who spoke on ‘Bloomberg Daybreak: Europe’ ahead of the OPEC meeting in Vienna, stated that there was a need for an extension of production cuts to stabilise the global oil market.

Asked if Nigeria would be able to reduce production, he said, “It is very difficult to do that but where we are now, everybody must be seen to contribute. Obviously, the smaller it is, the more amenable we are to participate; the larger it is, the more we will struggle to participate.

“We have got exemption three times understandably. This time round, I think there is a decision that everybody should be seen to chip in.”

Friday Ameh, Lagos based energy analyst told Sunday INDEPENDENT at the weekend that government will not be able to achieve the desired objective with the $60 per barrel benchmark.

“I consider the assumption as over ambitious and unrealistic since the sliding of the price is becoming uncontrollable,” Ameh said.

Muda Yusuf, director general of Lagos Chamber of Commerce and Industry, LCCI had last week described the budget as too small to create any meaningful impact compared with the size of the economy.

Yusuf, who spoke on Channels at 10 on Wednesday, said the budget is about five percent of the country’s Gross Domestic Product, (GDP), adding that the expected revenue is too small for investment in infrastructure.

Bismarck Rewane, Chief Executive of Financial Derivatives said that “At $60, the benchmark price could be ambitious.”