'No Immediate Plan to Alter Benchmark as Oil Price Drops to $56.42'

'No Immediate Plan to Alter Benchmark as Oil Price Drops to $56.42'

The Federal Government at the weekend ruled out any immediate plan to tamper with the oil benchmark put at $65 per barrel in the 2015 budget as crude oil price tumbled further, closing at $56.42 per barrel at Friday trading, about $9 below the budget benchmark.

It touched a post-2009 low of $55.48 the same day, having averaged around $110 a barrel between 2011 and 2013.

Data from the global oil market showed that front-month U.S. crude for February delivery settled down 58 cents a barrel at $52.69, before a steep 50-cent drop post-settlement.

Nigeria has changed its benchmark oil price in the 2015 budget twice, from $78 to $73 and lately to $65.

The Coordinating Minister of the Economy and Minister for Finance, Dr. Ngozi Okonjo-Iweala, could not be reached last night, but her spokesperson, Mr. Paul Nwabuikwu, said despite the latest price drop, there was no immediate plan to change  any aspect of the Medium Term Expenditure Framework (MTEF), although he disclosed that the Federal Ministry of Finance is watching the situation in the international oil market keenly.

The minister had earlier assured Nigerians that even if the oil price falls below $60, the government was ready for it.

According to her, based on extensive discussions with international experts within the context of emerging developments in the global oil market, the Nigerian Economic Management Team used three scenario-based approaches to arrive at the oil benchmark price proposed for the 2015 budget.

She however stated at that time that, “our scenario-based approach to managing the impact of the oil price drop is proactive and comprehensive. Even if the price drops to 60 dollars we are ready.

“As a central part of our strategy, we have revised our oil price expectations over the short to medium-term. We have lowered our benchmark oil price assumption to $73 per barrel after some careful analysis of the possible future direction of oil prices as well as the soft floor price for shale oil, which is estimated at about $75 per barrel.

“But let me clearly state that we are not taking a point-estimate position as regards the future price of oil. We fully recognise that oil prices may fall lower or even rebound.”

Prices, she added, could fall to $70 a barrel, $65 or even $60, adding that prices could also rebound to $75 to $85 a barrel.

“What we did was to work within a range of $60 to $85 thought possible by analysts, put a package of measures around an estimate at the mid-point of that range, that is $73, and then built additional measures for scenarios at $70, $65 and $60 a barrel.

“The best way to manage uncertainty is to take a scenario-based approach to be ready for alternatives that may occur. This is what we have done, so panic is not a strategy.

“What is necessary is a systematic and focused approach. This is what we have. Our fiscal measures comprise both revenue and expenditure effort,” she explained.

However, analysts suggested a more realistic benchmark of $50, with prevailing forecasts that oil prices will continue to fall.

Nigeria depends on oil revenue to bankroll its big recurrent expenditure, with its parliamentarians said to be the highest paid in the world.

Although the new threshold of $56.42 is yet to reflect in the Central Bank of Nigeria (CBN’s) official data, which still carries $59.97 as price of a barrel of crude on its website as at the weekend, economic watchers said the unabated fall of crude oil price has made another round of review of the budget benchmark a matter of time.

A foremost economist and Managing Director, Financial Derivatives Company of Nigeria, Mr. Bismarck Rewane, said sticking to $65 per a barrel of oil in the face of the free fall of oil prices was unwise.

He believed that a situation where the budget benchmark is higher than the spot price of the commodity is risky for the nation’s economy. His fear may have been kindled by the continuous fall of the crude oil price.

Rewane’s position is in sync with international oil market watchers who said at the weekend that low trading volume also made the market vulnerable to knee-jerk reactions.

The Organisation of Petroleum Exporting Countries, (OPEC), which includes Saudi Arabia, declined to restrict oil output in November despite pressure from its member nations.

In the United States, benchmark oil prices took some support from data on Wednesday showing inventories fell by 1.8 million barrels in the last week, but an increase of 2 million barrels at the U.S. crude contract's delivery hub of Cushing, Oklahoma, kept prices under pressure.

Traders were searching for a bottom in U.S. crude around the $52 a barrel mark, but Friday contained mostly sideways trading due to thin volume, said Carl Larry, director of business development at Frost & Sullivan.

"We're all waiting for the new money to come in next week," he said.

President Goodluck Jonathan had earlier acknowledged the fact that the drop in the price of crude oil, Nigeria’s main foreign exchange earner, will affect the country.

It will “affect us in one way or the other,” the president admitted, while speaking penultimate Sunday at the Christ Apostolic Church, Area 1, Abuja, venue of a Sunday service he attended. He however promised that “the economic team is working very hard to stabilise it and we believe that although there may be temporary inconveniences, it will definitely not bring the economy down.”