Saudi Arabia, the world’s largest crude oil exporter, has cut all official selling prices to buyers in Asia and the United States, mounting pressure on Nigeria and other producers to follow suit in order to remain competitive. Nigeria has seen its total revenue fall significantly since the 2014 drop in world oil prices and just as prices are beginning to recover, the country’s fortunes are set to take another hit.
Saudi Arabia’s state-owned oil company, Saudi Aramco, cut the pricing terms for its Arab Light, sold to Asia, by the most in 10 months as refineries face falling margins and an oversupply of oil in the world market. Aramco said, on Sunday, that it will sell cargoes of Arab Light in September at $1.10, which is below Asia’s regional benchmark and marks the biggest drop since November. It also reduced the official price for all other Asian clients. Prices for Light and Extra Light grades for US clients were cut by 20 cents and 40 cents, respectively, while the Medium and Heavy grades were unchanged. However, Aramco increased the pricing of all grades except Extra Light to northwest Europe and the Mediterranean.
“Nigeria would have to offer discounts to be able to secure its market share, meaning lower revenue for the government,” said Dolapo Oni, Head of Energy Research, Ecobank Capital. He said “Saudi Arabia is only reducing prices in places where it is still fighting for market share, because they are seeing higher production from Iran. There is no market share fight in Europe, but there is one in Asia and the US.”
Lower prices would mean that Nigeria will have to reduce its prices as a sizeable amount of her oil goes to Asia and Europe. Whenever the Saudi cuts its prices, crude oil will be affected globally due to the country’s size. So, Nigeria has to offer attractive discounts, especially in Asia, if it is to continue selling its crude oil. This development threatens the already bleak economic situation in Nigeria.
Last week, the Nigerian government announced that it will not be able to implement its yearly budget in full as a result of the sharp fall in oil revenues, which constitutes 70 percent of national revenue. In light of Saudi Arabia’s price cut, the price of crude oil is set to fall further, threatening the country’s major revenue source. With less funds in the government’s coffers the state’s ability to take out measures needed to elevate the economy from an impending recession is limited. The fall in the price of crude oil will have consequences in the foreign exchange market as the value of the local currency continues to sink. The Naira, which has been depreciating steadily against the Dollar for months, needs an urgent injection of hard currency into the foreign exchange market in order to stabilise. Unfortunately, the likelihood of such an injection coming from the Central Bank of Nigeria will diminish as crude oil revenue, which accounts for 90 percent of national foreign exchange earnings, is set to drop in September. Nigerian inflation hit a record high this month and even with an increase in the Monetary Policy Rate by the CBN, inflation is expected to rise further if the Dollar scarcity persists.
