US-Saudi Oil Price War Takes Toll on Nigeria

Dropping oil prices have taken a toll on Nigeria, a major oil producer whose central bank has had to raise the interest rate and devalue the naira in order to sustain the nation’s ability to meet debt payments.

MOSCOW, November 26 (Sputnik) — The central bank of Nigeria raised the interest rate for the first time in three years and depreciated the national currency, the naira, by roughly 10% Tuesday, in attempt to reduce losses to its foreign reserves as the oil-producing nation experiences turbulence amid slumping energy prices.

The Central Bank of Nigeria (CBN) moved its national currency peg to the US dollar to 160-176 naira per $1, as compared to the previous peg of 150-160 naira per $1. The new naira FX rate is an average 8.4% below the previous peg, set in 2011.  The allowed scope of FX rate fluctuations has been set at 5% plus-minus the midpoint, which is wider than the previously allowed 3%, as outlined in the CBN policy meeting communiqué. The previous naira devaluation occurred in November 2011, when the peg was lowered to 145-150 naira per $1. The CBN also raised the interest rate a full percentage point to a record 13%.

“The combined measures should help to support market sentiment in the near term and ease pressure on reserves,” Stuart Culverhouse of London-based Exotix Ltd. told Bloomberg. “It gives the Central Bank of Nigeria a better chance that it can get through to February’s elections without further or even stronger measures becoming necessary.”

This past month the national volume of foreign reserves has fallen by $2 bln to a five-month low of $37.2 bln. Nigeria’s hard currency reserves amounted at about $60 bln prior to the global crisis of 2008.

The CBN is attempting to maintain political stability ahead of the general election, set on February 14, 2015. More monetary tightening would hurt domestic consumption and impact voters’ attitudes.

Among the measures approved yesterday, the CBN also increased the requirement on cash reserves for private sector deposits to 20%, somewhat limiting the scope of operation of the nation’s banking system.

Nigeria, Africa’s biggest economy and also the largest oil producer on the Black Continent, relies on crude production as the source of 70% of government income and more than 90% of hard currency earnings. The recent plunge in oil prices has slammed other oil-producing nations, like Russia and Iran, as well.

Oil-rich nations, like Venezuela, Iran and Nigeria are facing hard times servicing external debt as their government revenues have dramatically decreased. Fiscal difficulties are also looming for these nations, while volatility in national currency FX rates have become a common issue for emerging markets since early 2014 when the first effects of the US Fed’s monetary tightening appeared. Other oil producers possessing more diversified market economies, like Russia, Algeria and Ecuador are facing economic recession due to the flight of capital, and hence the lack of investment. Mexico, Indonesia and Brazil, who are relatively less reliant on oil, will still experience a slowdown in growth.

Ahead of the November 28 OPEC meeting few traders expect cuts in global oil supply, meaning that many world economies will struggle in the medium-term. The previous decade of high oil prices had developed severe oil dependence in several large economies, and now most of them are facing painful structural reforms, as higher oil prices are nowhere to be seen in the next couple years.

“There are still risks around oil prices,” Ridle Markus of Johannesburg-based Barclays Africa Group Ltd. told Bloomberg. “It could get worse for them.”

CBN head Godwin Emefiele said the government-expected oil price of $73 per barrel of crude may be “overly optimistic.” “The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” Emefiele said.

These considerations fall in line with today’s remarks from Saudi Arabia, as the OPEC leader signals it is unlikely to approve any major changes in oil production. Saudi Oil Minister Ali al-Naimi said the crude market will “stabilize itself eventually,” indicating the Saudi commitment to carry on with the price war against US shale oil. There is historical precedent to such a war, such as when the Saudis knocked out US oil production in the so-called ‘oil bust’ of 1986.

For American shale oil-producing companies, the average breakeven threshold is about $70 a barrel, with the lowest at $40 a barrel, as evidenced by Bloomberg data. About 25% of US shale oil production was rendered unprofitable at a price of $80, however, we see further increase in US oil production. For Saudi Arabia, the fiscal breakeven point has been $99.2 a barrel for 2014, having risen to $104.4 for 2015, according to Business Insider. This means that while America suffers commercial losses, Saudi Arabia will experience trouble with its budget.

The Saudis have not yet, however, shown a willingness to back off as they are desperate to retain their share on the global oil market. This is the main reason to anticipate further slumps in oil prices.