Understanding Yesterday’s Oil Price Drop As a Nigerian (I)
Yesterday, Chioma asked me to explain simply in a (long) post the drop in oil prices especially as it concerns you and while I was typing away this morning, I got this email from Ronald Nzimora, the internet marketer, explaining exactly what I was putting together in layman terms. Mine wasn't as gory though, but you know Ronald is a marketer. Enjoy still!
There is FIRE on the mountain.
No I don't mean to scare you.
But I do want you to PAY ATTENTION.
Yesterday, the unimaginable happened.
WTI crude, the crude they make in the USA sold for 90 cents a barrel. (after I finished typing this, it had gone down to less than $1, effectively negative)
That is =N=40 naira a barrel.
How come? Why did this happen?
In a nutshell, here's the gist.
Every month oil producers sell oil in advance to buyers who research the market, predict conditions and place orders IN ADVANCE to lock in lower prices.
Now if you are an oil buyer, and you pay Ronald Refineries (that's a really cool name btw) to buy oil at a certain price in May 2020, by May 21st, 2020 or so, YOU MUST take delivery of the oil from Ronald Refineries so they can have space to put new ones being produced.
The people who had already bought the oil were per their contract supposed to take delivery of the oil. Now since there is nowhere to put the oil if they take it, (because all storage facilities are full as hardly anyone is buying or using oil right now), they are now paying the people they bought the oil from to keep the oil for them!
This is why WTI crude went negative yesterday.
Now onward to us in Nigeria.
Our own crude oil, BRENT, at the same time was selling for around $24 (at the time I was typing this).
Don't shout "Halleluyah" yet.
Because you see, according to the NNPC GMD, Mele Kyari, it costs Nigeria $30 to produce one barrel of Brent.
So effectively, when you do the math, you'll see that we're making around -$6 (minus!) per barrel!
Freaking Holy Jesus Christ!
I am not making this up. Even Mele Kyari, the GMD of NNPC said the same thing!
As if that's not bad enough, our 2020 national budget was drawn up with an oil price expectation benchmark of $57 a barrel!
Then last week, the Government after having a reality check, cut it down to $30.
But it's not uhuru because, if our benchmark is $30, and we're producing for $30 which means in case you forgot the maths, we're now making zero, and the buyers are buying for $24, which means we're now losing $6 per barrel, it doesn't take a soothsayer to know that we are in freaking trouble!
But no, our problems are not over. Not by a long shot
I can hear you screaming, "Nitori oloun, Ronald! What else?"
Forgive me, but let me give you a little background. I swear the story is "jewzzy".
In 2014, as soon as their refineries perfected how to extract their WTI crude cheaper than what it cost them to buy from others, the USA, our biggest oil buyers stopped buying our crude oil (and from other countries too)
That left us, Nigeria, with China and India as our alternative buyers.
So the competition became brutal - Iraq, Iran, Oman, Saudi Arabia, basically the entire Middle East, Russia, pretty much everyone else with oil was competing with us, and this sent oil prices crashing.
Over the years, the price of oil went down from a high $110 to as low as $45.
Then Covid-19 hit. I'm sure you know this story well.
The virus spread, businesses shut down, Governments announced "sit-at-home" orders.
Now remember China and India are our current oil buyers, right?
Well, with them announcing lockdowns and industries shuttering, no one is buying any crude, much more ours.
So that meant that, we can't sell!
Infact, again according to the NNPC, Nigeria has millions of barrels of oil in oil tankers floating in the sea as I type this right now.
And even worse, millions of barrels more are produced everyday, and there is nowhere to store them!
Talk about a triple-threat. It's like cancer, diabetes and heart failure affecting one patient at the same time!
So you remember that $7 profit I explained we were making earlier, we are not even making it.
You know why?
Because we have NO BUYERS.
No one is currently buying! Not China. Not India. Certainly not the USA. Or Germany. Or anybody.
All these countries are concerned about is figuring out a way to stop the Corona virus.
Now, also yesterday, I heard, that already Governors of the States are rejecting their allocation, because it's not enough to pay their salaries much less run the State, and well, you know, steal.
It's going to be RED, Tosin, RED!
We are gasping for breathe, and even though a miracle happens, and somehow COVID-19 ends and oil prices go up to say $50, (and by God I pray it does), our production costs are still the same, meaning we're earning still very little.
There is fire on the mountain!
Why am I telling you all this? Why should you care?
I'll tell you why you should.
It's time you start looking out for YOU.
Yes, if you have not already, you need to start looking out for yourself and your family.
You need to start taking decisions AND actions that free you from the shackles of economic conditions tied to crude oil and Nigeria, even though you still live here.
Why should you do this?
Are you really asking me this?
Okay. I'll tell you.
It's because no bloody Government in Nigeria cares about you!
If you need any proof of this, let me ask you, how much did the Government send to your bank account to help you during the current Corona virus lockdown period?
Nothing? I thought so!
Other Governments - USA, Canada, UAE, etc gave their citizens money.
"But Ronald, Govt shared money to the "poorest of the poor"".
Okay, I am glad you are not one of them poor, but ask yourself, if this crisis continues for another 2 months or more, will you be able to cope financially?
Or will you be wishing Govt sends some money your way by then?
"But Ronald, Sanwoolu shared food items".
Okay, what did you receive in your house?
Oh you were among those lumped together with other houses and given 3KG of rice and one loaf of bread to share?
Look, okay, it's not funny, but don't waste your time looking up to the Government to save you in a crisis.
The only hope you have is... YOU.
Only YOU can save yourself.
So how do you do that? How do you save yourself?
I'll tell you in tomorrow's email.
Make sure you READ IT.
You and your family's future may very well depend on it.