How FG arrived at $73 per barrel benchmark price for crude oil

The Federal Government through the minister of Finance and the Co-ordinating Minister for the Economy, Ngozi Okonjo-Iweala, announced last Sunday, some measures to insulate the economy from the oil price slump.

A key measure announced was a cut of the 2015 oil benchmark price from $78 to $73 per barrel. BusinessDay investigations reveal that this measure was not reached in a haphazard or rushed manner, but based on statistical analysis – an Autoregressive Integrated Moving Average (ARIMA) model, and carried out over several months.

The new benchmark price is based on

the findings of the 2015-2017 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper , which was published in September this year.

It was stated in the paper, “We estimate the benchmark oil price to be $73.28pb based on the 15-year moving average, while the 10-year moving average gives a price of $92.34pb.”

The 15-year moving average captures the beginning of the commodity super cycle, and covers the boom and bust cycle of the period. It also smoothes out short-term fluctuations and highlights longer term trends.

On the future trend of oil prices, the paper alludes to a paradigm shift, stating, “there are indications that the spikes in oil prices witnessed in recent years are likely to ease following [the] increase in global oil supply.”

It is estimated that crude oil production in the US would average 9.3 million barrels per day (mbpd) in 2015 — its highest level since 1972.

The paper however points out that a sharp drop is unlikely but moderation from current level is a high possibility; implying a further decrease in oil prices.

The price of oil has dropped by 28 per cent from June, spurred by stagnant global economic growth, slow growth in oil demand, and increasing oil supplies from shale oil in the US, record oil production in Russia, and the resumption of production in oil producing countries plagued by unrest.

According to the paper, the price forecast is “premised on the increase in the exploitation of shale oil, as well as improved Iranian oil supply and the potential resolution of political crisis in some major oil producing countries like Libya.”

Adding to this, is the spill over effect of the Russia-Ukraine geopolitical risks, lowering trade activities – the EU accounts for over 40 percent of Nigeria’s export. Additionally, the slowdown in growth in countries like Brazil and China is expected to have an impact on demand.

This paradigm shift would pose dual risks to the economy – risk to oil price as well as the demand for our crude oil, says the paper.

WTI Crude dipped below $75/b earlier last week – the lowest in four years; and Brent Crude is trading $79, rising from $77/b on Monday.

The Bonny Light Crude is currently at $79.

Nigeria is expected to produce 2.27 million bpd next year, generating revenue of N6.8 trillion, Okonjo-Iweala said at the press conference.

Businessday