Introduction

Africa is an important player in the world of oil production, with a total output share of over 12 percent and consumption in the threshold of 10 percent. Improved trade performance, particularly among oil exporters, is considered a major factor of economic growth, measured by the Gross Domestic Product (GDP), as the countries are highly dependent on natural resource exports for both foreign exchange and government revenues. In the past, buoyant oil, gas and mineral price increases have enabled resource-rich African countries to increase their natural resource exports and revenues substantially. These enhanced revenues demonstrate the significance of natural resources in output growth and capacity to generate export revenues. For example, oil revenues account for more than half of all revenues of leading sub-Saharan African oil and gas producing countries like Angola, Congo, Equatorial Guinea, Gabon, and Nigeria. It is in view of the preponderant dependence by African producing countries on oil and gas revenues that the current outbreak of coronavirus presents major economic and socio-political challenges to the health of their economies. The coronavirus disease 2019 (COVID-19), that has now been declared a global pandemic by the World Health Organisation (WHO), emerged in Wuhan city, Central China. It has since spread to many other countries and regions of the world by Chinese and international travellers. The virus is different from the 2013-2016 Ebola outbreak, which was more deadly but less contagious and was eventually contained due to substantial financial support to Africa by richer countries. The coronavirus presents larger, more interdependent global economy with serious management challenges. Moreover, the pandemic came at a time of dwindling trust within and between countries leading to growing domestic unrests, economic and trade skirmishes amongst some leading world powers which are having serious impact on the dynamics of the global economies and commodities market.

Impact of Coronavirus on Global Oil and Gas Markets

The virus is having astounding effect on the global oil and gas industry. According to S&P Global Platts, the energy analytics firm, the coronavirus could reduce global oil demand by as much as 4 percent, or 4.1 million barrels a day, in February 2020. For the full year, the firm projects an average daily fall in global demand of 290,000 to one million barrels. Just a few weeks after the outbreak of the virus, daily Chinese oil demand was down 20 percent because of dwindling air travel, road transportation and manufacturing. Since China consumes 13 of every 100 barrels of oil the world produces, every oil company will feel the impact of its consumption reduction. Most of the 10 million barrels a day that China imports come from Russia, Africa and Iran and other Persian Gulf nations. Some oil and gas producing countries have already been forced to sharply discount their shipments.

Officials of some of the world’s largest oil producers are scrambling to stem a sharp fall in prices over concerns that the acceleration of the coronavirus epidemic will reduce global demand, particularly from China, the biggest importer. The Extraordinary 178th Meeting of the Organization of the Petroleum Exporting Countries (OPEC) was held in Vienna, Austria, on the 5th of March 2020. The communique after the meeting stated that “the COVID-19 outbreak has had a major adverse impact on global economic growth and oil demand forecasts in 2020, particularly for the first and second quarters of the year. Global oil demand growth in 2020 is now forecast to be 0.48 mb/d, down from 1.1 mb/d in December 2019. Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside. Accordingly, in view of the current fundamentals and the consensus on market perspectives, the meeting decided to recommend the extension of the adjustment levels agreed at the 177th Meeting of the Conference and the 7th OPEC and non-OPEC Ministerial Meeting for the remainder of the year. It also agreed to recommend to the 8th OPEC and non-OPEC Ministerial Meeting a further adjustment of 1.5 mb/d until 30
June 2020 to be applied pro-rata between OPEC (1.0 mb/d) and non-OPEC producing countries (0.5 mb/d) participating in the Declaration of Cooperation”.

The Conference commended all OPEC Member Countries, as well as non-OPEC countries participating in the Declaration of Cooperation, for their continued commitment to achieving and sustaining balance and stability in the market. These measures are to limit the probable destructive impact of the coronavirus pandemic on the global oil and gas markets. However, the efficacy of these measures continues to be threatened by the refusal of Russia to follow OPEC with further cuts to match the slump in demand caused by the coronavirus pandemic. Thus, precipitating a price war that could further plunge the global oil and gas market into a prolonged downward spiral in oil and gas prices.

Reduced Global demand and Africa’s Oil and Gas Trade

For several years now, China has become Africa’s largest market for crude oil and other raw materials. Therefore, reduction in demand by China would have untold fiscal and budgetary implications that could seriously jeopardize economic growth prospects for the year in some African oil and gas producing countries. Already, the International Monetary Fund has cut its projection for Nigeria’s 2020 economic growth to 2% from 2.5% due to plunging oil prices stemming from the coronavirus outbreak. Nigeria is the continent’s biggest producer and depends on crude for 90% of its exports. Commenting on the impact of the coronavirus on the oil and gas sector, Nigeria’s Finance, Minister Zainab Ahmed, said “The oil price shock, due to the coronavirus, came as a great surprise to the Nigerian government and the impact has put significant strain om the budget and the currency. The government may have to adjust its 2020 budget, which was based on a crude price of $57 a barrel”. “We are concerned about the current drop in oil price because it’s now below our budget. We will do a mid-term review, and if the impact is so much, we will need to do an adjustment in the budget, working together with the National Assembly,” Already, the downward spiral in oil and gas is fueling speculations of devaluation of the currency among the country’s Bureau de Change operators.

The low demand for oil and gas products is already causing difficulties for producing countries in trading their outputs in the market. According to Mallam Kyari, the Managing Director of the Nigerian National Petroleum Corporation (NNPC), the national oil Company, Nigeria has about 50 cargoes of crude oil that have not found landing, adding that this implies that there are no off takers for them for now due to drop in demand. He added that, “there are over 12 stranded LNG cargoes in the market globally. It has never happened before. LNG cargoes that are stranded with no hope of being purchased because there is abrupt collapse in demand associated with the outbreak of coronavirus”. He said further that “in the face of the coronavirus global pandemic, countries like Saudi Arabia have given discount of $8 and Iraq $5 to their off takers in some locations meaning that when crude oil sells at $30 per barrel, countries like Saudi Arabia is selling at $22 per barrel and Iraq selling their crude at $25 per barrel”.

In April 2020, Oil prices moved into negative territory for the first time in history after demand dried up and lockdowns across the world spread due to COVID-19. The price of oil suffered its biggest drop since the Gulf War in 1991, falling by more than 30 per cent initially, before partially recovering and trading at about a 20 per cent drop. The Economist Intelligence Unit (The EIU) reported that the plunge of WTI oil prices was largely driven by technical factors with traders selling off positions ahead of the expiry of the May contract. “The unprecedented level of the fall, to as low as -$40, also reflects the exceedingly bearish sentiment about the state of the oil market’s fundamentals” EIU lead analyst Peter Kiernan said. However, the EIU has reported that price pressure will continue in the coming months as storage rapidly builds up and the global economic outlook remains weak. In response to the shocks in the oil market, the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producing countries recently agreed to cut almost 10 million barrels per day (mb/d) in oil production. The agreement will see participating countries adjusting their crude oil production by 9.7 mb/d from May for an initial period of two months. OPEC announced that from July to December the total adjustment period would be 7.7 mb/d, followed by a 5.8 mb/d adjustment for a period of 16 months (January 2021 to April 2022).

African countries that depend largely on revenues from oil and gas exports may find it difficult to match the serious competition and price war by Saudi Arabia and Iraq. The price war will be harmful to public finances in parts of the Gulf as well. For instance, Oman’s 2020 budget projected a deficit of 8% of GDP even with oil at $58 a barrel. Prices at $30 would send the deficit as high as 22%. Bahrain, an average producer that nonetheless relies on oil for around 75% of public revenue, had hoped to balance its budget by 2022. Both will probably have to cut spending and borrow money. Helima Croft, head of global commodity strategy at RBC Capital Markets warned that “today’s price action puts at risk the fiscal health of the vast majority of sovereign producers; budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices. For the most politically and economically fragile producer states, the reckoning could be severe.” No doubt, the implications of low oil and gas prices would be severe for African producers.

Angola also suffers indirectly from the corona pandemic because the economy and finances of the country depend almost entirely on oil. The slowdown in trade with China, due to the epidemic, will affect oil exports and jeopardize the recovery of the country’s economy. According to an Angolan economist Precioso Domingos “since China is Angola’s largest oil importer, coronavirus has a direct impact on the price of oil because Angola’s revenues are falling dramatically. While rising oil prices would be an incentive to increase production and make new investments in the Angolan oil sector, falling prices, on the other hand, are “poison to a fragile economy like that of Angola”. He went on to say that “the coronavirus can be more harmful to countries like Angola in the medium term than to China itself because the resilience of the Chinese economy is far greater that those of African producers like Angola”.

Reuters survey of economists reported that they expected China’s economic growth to decline to 4.5% in the first quarter of 2020, down from 6% in the previous quarter. Overall, China’s GDP growth may slow by 0.5 percentage points this year, taking at least 0.1 percentage point off global GDP growth. However, the economists were optimistic that China’s economy would recover quickly if the virus could be contained. Aside from the economic effects of the virus, developing countries, particularly in Africa will have to grapple with social impact of the pandemic. Some of these countries have weak health systems and thus lower resilience to pandemics. Many developing countries lack surveillance, diagnostic, hospital infrastructures and capacities to identify, isolate, and treat patients during an outbreak. Weak systems could increase the possibility of widespread contagion and the resulting social and humanitarian consequences that could compound the fragile economic and public finance situations of the countries.

Conclusion

As the world grapples with the coronavirus, the economic impact is mounting with the Organisation for Economic Cooperation and Development (OECD) warning that the virus presents the biggest danger to the global economy since the financial crisis. Businesses are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns, people lockdowns and other countries extending travel restrictions. Presenting the Interim Outlook, OECD Chief Economist Laurence Boone said: “The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions. Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.” The combination of the coronavirus epidemic, and the slump in global oil prices, means that investment will contract sharply this year, especially in the energy sector, and export growth will slump. No doubt, the coronavirus pandemic poses a lot of challenges to African oil and gas producers in terms of revenue loses and the trading of their products in the international oil and gas market. As a palliative measure, the countries should put in place strategies and policies that would attenuate the socioeconomic impact of the reduction in revenues from oil and gas sales due to market disruptions. Such policies should include the diversification of their economics, efficient management of revenues, commitment to local value addition in the oil and gas industry through national industry participation and a drastic reduction in corruption and misallocation of limited resources. In addition, African countries need to put in place effective strategies and response mechanisms that will enable them to combat and contain the pandemic whenever it comes to their nations so as to limit adverse effects on economic activities and human casualties.

In the long run, a sustained decline in the price of oil may not be a bad thing for African oil producers if it pushes them to diversify their economies away from dependence on oil and gas. Though oil makes up a huge proportion of exports and government revenue in these countries, their combined share of global output is not substantial. African countries need to invest in critical sectors of their economies such as education, health, infrastructure, and agriculture to provide a solid base for industrialization, local value added, economic development and sustainable growth.

Finally, the coronavirus pandemic has also affected AMETRADE’s program of events for the year. Some events that were planned towards the end of the first quarter and the early part of the second quarter have been rescheduled. Apart from this, its program is heavily concentrated on promoting the oil and gas sector in Africa. Therefore, any adverse effect on the sector in the continent will have a direct influence on its activities. It is hoped that the measures that are being put in place to contain the acceleration of the virus would yield desired results so that the company can implement its calendar of events for the year 2020. Meanwhile, the Management and staff of AME Trade are using this opportunity to sympathize with the individuals, families and countries that have been affected by the coronavirus. We share in their pains and pray that the pandemic will be quickly contained so that global economic and social activities can resume without further delay.