Nigeria’s oil benchmark retreats on hope of Iran deal

Nigeria’s fiscal outlook remains largely insulated from the latest downturn in global oil prices after crude futures fell below $80 per barrel for the first time since March, easing concerns over an immediate threat to the country’s 2026 budget assumptions.

The decline follows a memorandum of understanding (MOU) between the United States and Iran that extends their ceasefire by 60 days while negotiations continue over Tehran’s nuclear programme.

The agreement raised expectations of a potential easing of US sanctions on Iran, the reopening of the Strait of Hormuz, and the restoration of disrupted oil and commodity flows.

According to commodity intelligence firm Argus Media, energy and fertiliser prices fell by between 10 and 15 percent week-on-week following the agreement, reflecting market expectations of improved supply conditions and lower geopolitical risk.

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“Crude futures fell below $80/bl for the first time since early March,” David Fyfe, chief economist at Argus Media, said in the firm’s latest Commodity Macro Review.

The market reaction comes despite US crude inventories falling to their lowest level since March 1985, highlighting the extent to which geopolitical developments rather than physical supply fundamentals have influenced recent price movements.

For Nigeria, however, the latest price retreat remains well above the federal government’s fiscal assumptions.

The Senate approved a crude oil benchmark of $64.85 per barrel and a production target of 1.84 million barrels per day as part of the Medium-Term Expenditure Framework underpinning the 2026 budget. At current market levels, Brent crude remains roughly $15 per barrel above the benchmark price.

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The conservative benchmark means the country’s public finances can absorb moderate declines in oil prices without immediately undermining budget implementation.

Analysts said the greater challenge for Nigeria is likely to be achieving its production target rather than coping with current price levels.

Nigeria’s crude production has improved over the past year following intensified efforts to curb crude theft and pipeline vandalism. However, sustaining output close to the budget assumption remains critical to government revenue projections.

Nigeria exceeded its crude oil production quota set by the Organisation of Petroleum Exporting Countries (OPEC) for the first time in 10 months in May, signalling a significant turnaround in the country’s efforts to revive output amid years of oil theft, pipeline vandalism and underinvestment.

“Nigeria’s economic outlook has continued to improve, supported by stronger macroeconomic stability, robust oil production, recovering private consumption and firmer business activity,” OPEC stated.

A sustained decline in production could erode fiscal gains even if oil prices remain comfortably above the benchmark. The report also highlighted risks that could weigh further on crude prices in the months ahead.

One of the most significant is the prospect of additional Iranian crude entering international markets if ongoing negotiations lead to a relaxation of sanctions.

Argus noted that the ceasefire agreement could potentially result in a loosening of US restrictions on Iran, increasing global oil supply and intensifying competition among producers.

The report further pointed to signs of weakening demand from China, the world’s largest commodity importer.

China’s commodity imports between January and May were broadly flat compared with the same period last year. While iron ore imports rose by six percent, crude oil imports declined by approximately 600,000 barrels per day year-to-date.

The weakness was reinforced by a 16.2 percent year-on-year contraction in China’s property sector investment during the first five months of the year, underscoring broader concerns about domestic demand.

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For oil-exporting countries such as Nigeria, slower Chinese demand growth could limit upward momentum in global crude prices even if supply remains constrained elsewhere.

The report also noted that the US Federal Reserve left interest rates unchanged at its first policy meeting under new Chair Kevin Warsh, although nine of the 19 policymakers reportedly expect at least one rate increase before the end of 2026.

Meanwhile, the US Dollar Index gained 1.1 percent during the week as investors continued to favour the dollar as a safe-haven asset.

A stronger dollar typically exerts downward pressure on commodity prices because oil and most internationally traded commodities are priced in the US currency.

While lower oil prices could reduce export earnings for producing countries, they may also provide some benefits to import-dependent sectors of the Nigerian economy.

Cheaper crude prices could moderate the cost of refined petroleum products, including petrol, diesel and aviation fuel, easing pressure on transportation, manufacturing and logistics costs. Such developments could contribute to slowing inflation, which remains one of the country’s most pressing economic challenges.

Despite the market optimism that followed the US-Iran agreement, Argus cautioned that geopolitical risks remain elevated.

Shipping companies and regional political leaders expressed concern that Iran’s proposal to impose transit fees after the 60-day ceasefire period could trigger renewed tensions. The report noted that shipping firms believe restoring pre-crisis maritime flows and commodity exports could take several months even if the peace agreement holds.

The optimism was further dented over the weekend when Iran reportedly threatened to close the Strait of Hormuz again after Israeli strikes on Hezbollah targets in Lebanon, which Tehran viewed as a violation of the ceasefire agreement.

US and Iranian negotiators subsequently met in Switzerland for further talks aimed at preserving the agreement.