Oil Price Fell By 6.0% in August – OPEC
More woes for Nigeria as prices drop below $70 per barrel
In a significant development, the global oil benchmark, Brent crude, experienced a sharp decline in August, falling by $5.00 or 6.0% to an average of $78.88 per barrel month-on-month, according to the latest report from the Organisation of Petroleum Exporting Countries (OPEC). Similarly, the West Texas Intermediate (WTI) dropped by $5.05 or 6.3%, standing at $75.43 per barrel. This steep decline is the latest in a series of challenges facing oil-exporting nations, with Nigeria poised to bear the brunt as prices dip below $70 per barrel.
The OPEC Reference Basket (ORB) of crude, which tracks the pricing of crude oil from member countries, fell by $6.02 or 7.1% to average $78.41 per barrel in August. According to OPEC’s September Monthly Oil Market Report, the drop reflects significant value losses across all OPEC crude values, with medium sour benchmarks hit particularly hard, declining by an average of 4.7% to 8.1%.
“All ORB component-related crude benchmarks fell in August, especially medium sour benchmarks,” the report noted. Compared to last year, the ORB was still up by $2.44 or 3.0%, averaging $83.04 per barrel for the year so far. However, the August drop spells concern for oil-dependent economies like Nigeria, where the Bonny Light and other regional crude grades from West and North Africa, such as Djeno, Es Sider, Girassol, Rabi Light, Sahara Blend, and Zafiro, also declined. These grades fell by an average of $3.93 or 4.7%, to stand at $78.39 per barrel.
OPEC attributed the downturn in oil prices to a variety of factors, including easing geopolitical tensions and an uncertain economic outlook in China, which has dampened market sentiment. The oil futures markets also saw substantial selloffs from non-commercial participants, further contributing to the elevated price volatility during the month.
The report explained: “Hedge funds and money managers, after reducing their net long positions in July, continued selling in August, reflecting an increasingly bearish outlook on crude oil. This shift in sentiment contributed to the persistent volatility in oil prices throughout the month.” As a result, money managers reduced their net long positions in Brent crude futures and options to their lowest levels since 2011. In WTI futures, there was a significant closure of long positions and a slight increase in short positions, accelerating the price decline.
OPEC further revised down its forecast for global oil demand growth in 2024. The organization now expects global demand growth to reach 2.0 million barrels per day (mb/d) next year, a slight reduction from previous estimates. While the demand growth in OECD countries is expected to be just over 0.1 mb/d, non-OECD nations are projected to see a much more substantial increase of over 1.8 mb/d, driven primarily by China and supported by other nations in Asia, the Middle East, and Latin America.
Oil Price Drops Below $70/b
On Tuesday, Brent crude fell below the psychologically significant $70 per barrel mark, dropping by 3.45% to $69.36 per barrel—the lowest price since December 2021. WTI also plummeted by 3.86%, settling at $66.06 per barrel.
According to a Bloomberg report, the price drop is linked to troubling economic data from the United States and China, which have heightened fears of weakening oil demand. Additionally, the increasing production output by non-OPEC+ members has further exacerbated concerns among traders.
This drop comes just days after OPEC and its allies, including Saudi Arabia, Russia, Iraq, and the UAE, postponed plans to increase oil production by 180,000 barrels per day. As a result, these countries have extended their voluntary cuts of 2.2 mb/d until November 2024. OPEC has indicated that it will phase out the production cuts on a monthly basis starting in December, with overproducing nations committed to fully compensating for any overproduction by September 2025.
Implications for Nigeria
For Nigeria, a country heavily reliant on oil revenue, the continued fall in oil prices represents a critical challenge. Oil and gas exports account for approximately 90% of the nation’s foreign exchange earnings and the bulk of its national revenue. The falling prices, coupled with Nigeria’s low oil production rates, are set to strain the country’s fiscal situation further.
Nigeria’s 2024 budget is benchmarked at an oil production level of 1.785 mb/d and an oil price of $77.96 per barrel. However, the OPEC report indicates that Nigeria’s production in August averaged 1.4 mb/d, up from 1.3 mb/d in July—a 3.4% increase. Despite this slight improvement, Nigeria’s oil production remains below its budget benchmark, and the declining prices will make it harder for the government to meet its revenue targets.
The fall in oil prices is likely to have further repercussions on Nigeria’s currency, the naira, which has already depreciated significantly in recent weeks, trading at around N1,600 to the US dollar. With inflation rates at 33.4% year-on-year in July and food inflation at 39.4%, the Nigerian economy is under severe pressure.
At the National Assembly in December 2023, the Group CEO of the Nigerian National Petroleum Company Limited (NNPCL) expressed optimism about the country’s ability to meet its oil production targets for the 2024 budget. However, the continued downward trend in oil prices, combined with challenges around production, casts doubt on whether these projections will be achievable.
Global Oil Market Outlook
OPEC’s report noted that global oil demand is expected to reach 105.6 mb/d in the fourth quarter of 2024, driven by strong demand for air travel, road mobility, and industrial activities in non-OECD countries. While demand growth remains strong, especially in China and other emerging markets, uncertainties in the global economy present risks to the oil market outlook.
In summary, the decline in oil prices presents a significant challenge for oil-exporting nations, particularly Nigeria. With the global oil market in a state of flux, the economic repercussions could be far-reaching, affecting everything from government revenues to inflation and currency stability in countries reliant on oil exports. As OPEC and its allies navigate these turbulent times, all eyes will be on how the global oil market stabilizes in the coming months
