Falling Oil Production, Theft Compound Nigeria’s FX Woes

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Despite rising oil prices, Nigeria’s foreign reserves have suffered greatly since the turn of the year, following decline in oil production and activities of oil thieves.

The oil sector provides for 95% of Nigeria’s foreign exchange earnings and 80% of its budgetary revenue.
According to data extracted from the daily external reserves tracker of the Central Bank of Nigeria (CBN), just in January of 2022 alone, Nigeria’s foreign reserves lost $481.4 million as it dropped from $40.52 billion recorded in December to $40.04 billion as of January ending while it also dropped to $39.86 billion as of the end of February 2022, representing a 0.44 percent decline compared to $40.04 billion recorded as of the previous month.

The recent decline represents the fourth consecutive monthly drop in the country’s reserves level despite increasing crude oil prices and the invasion of Ukraine by major crude oil producer, Russia.

The decline was due to apex bank’s ongoing intervention scheme in the country’s forex market. For a long time, the CBN has been supplying dollars to help meet FOREX demands and stabilise the currency market.

For context, the CBN supplied as much as $8.97 billion in the third quarter of 2021 alone through the Importers & Exporters window.

It should be noted that the crash in oil prices back in 2020 (which was caused partly by the COVID-19 pandemic) had contributed towards worsening Nigeria’s forex crisis.

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As it is widely known, crude oil is the mainstay of the Nigerian economy. What this means is that the country generates much of its FOREX earnings through crude oil sales.

The higher the crude prices, the higher the revenue the country generates, and vice versa. Significantly, Nigeria seems to be getting many things wrong as the country cannot take advantage of high oil prices and a higher production quota, as a result, foreign exchange policies continue to negatively affect investors and regular citizens coupled with insecurity concerns which are also escalating.

This is the reason why Nigeria is missing out on $100 oil as OPEC increases quota. After the OPEC meeting on March 31, the cartel voted to maintain the increase in allocated production quota to member countries at the already set pace of 400kbpd.

As a result, Nigeria’s allocated quota increased from 1.735mbpd in April to 1.753mbpd in May (excluding condensates).

Although the allotted 18kbpd increase can be considered meagre, OPEC has, since the start of the year, increased Nigeria’s allocated quota to the tune of 87kbpd, from 1.666mbpd in December 2021.

However, Nigeria’s oil production continues to decline as the country grapples with oil theft and dissipating investment.

On average in the first quarter of 2022, Nigeria under produced by 200kbpd which translates to $1.8 billion in total lost oil revenue (based on $97/bbl average oil price).

Sadly, production is likely to stay low in the interim while other producing peers reap the benefits of a new $100/barrel oil era.

The group managing director of the Nigerian National Petroleum Company (NNPC) Limited, Mele Kyari, disclosed that Nigeria lost a total of $1.5 billion between January and March of 2022 to crude oil thefts.

“When you lose about 200,000 barrels per day, even at an average price of $65 per barrel, we lost close to $1 billion between January and March. From January till date, we lost an average of 250,000 barrels per day and at the current price of about $100 to a barrel, even within this short period, we have lost close to $1.5 billion,” Kyari told House Committee on Petroleum (Upstream).

This led to decline in production from the Bonny Terminal”. Analysts at Cordros Research said, “In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR.

“However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low.

By The Independent


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