Explainer: Oil is heading for $60: Here is what it means for Nigeria

For most oil-producing countries, when crude oil prices are rising, it’s good news. For Africa’s biggest oil-producing country, it’s a double-edged sword.

On Thursday, the price of a barrel of Brent crude moved closer to $60 after the Organisation of Petroleum Exporting Countries (OPEC) and other alliances of major producers committed to maintaining reduced oil output to balance fuel demand.
Brent crude futures rose by $0.47, or 0.8percent, to reach $59.93 a barrel while the US West Texas Intermediate (WTI) crude futures increased by $0.49, or 0.9percent, to reach $56.18 a barrel, according to data from Bloomberg.

“Crude prices have been rising higher now that OPEC+ has convinced the energy market that they are determined in accelerating market rebalancing without delay,” Edward Moya, a senior market analyst at OANDA said on Thursday.

At a meeting held on 3 February 2021, OPEC and allies, known as OPEC+, pledged to extend their current policy of oil output cuts.

Also, the US Energy Information Administration, US crude oil stockpiles dropped by 994,000 barrels this week to 475.7 million barrels, representing the lowest since March 2020. This further supports increased oil prices.

For most OPEC members, the rising oil price is good news for the global energy industry laid low by the demand-sucking pandemic, but for Africa’s biggest oil-producing country that slipped into a second recession in five years, it presents two-way conditions for its economy.

More cash for 2021 budget

Higher oil price brings cheer to Nigeria and other oil-dependent economies languishing under ballooning debt and lower government revenues.

Nigeria needs the oil price to rise and in the worst case, remain steady at any price above the $40 benchmark of the 2021 budget while also maintaining oil production estimate of 1.86 million barrels (inclusive of condensates of 300,000 to 400,000 barrels per day).

“We think an above US$40/bbl Brent price remains healthy for the 2021 budget revenue projections which is critical to achieving the historic revenue numbers projected in an ambitious budget,” analysts at Lagos-based CSL Stockbrokers said in a research note.

Nigeria, Africa’s largest economy depends on earnings from oil to finance its N13.588 trillion 2021 budget.

Petrol subsidy vs higher PMS price

While higher oil prices translate to higher revenue, it also means if the Federal Government’s pricing template is anything to go by, Nigerians may have to brace for an increase in the pump price of fuel in February.

This is going to add more financial burden to Nigerians who are already complaining of the high cost of petroleum products, which has negatively impacted on the price of goods and services.

“We note that an increase in oil prices will imply an increase in the price of petrol which may either mean a further upward adjustment in petrol prices or a return to the subsidy regime,” analysts at CSL Stockbrokers said.

For most oil marketers, the unmoved price of petrol amid the rise in oil prices is a clear indication that Nigerian National Petroleum Corporation (NNPC) has started bearing petrol subsidies which have perennial been a subject of abuse and corruption.

This development is expected to add to the wasteful consumption burdens of an already cash-strapped government who has produced some of the continent’s best-known billionaires, while at same time creating a deeply unequal society in which almost half the population lives in extreme poverty.

Nigeria spent approximately $28billion on subsidies between 2006 and 2018 alone, a financial burden that hampers development in other crucial sectors. Nigeria is still 3 years away from the next election cycle in 2023, under an administration that is in its second and final term.

Relief for EuroBond

The news of higher oil price is also expected to ignite more interest in Nigeria’s Eurobond market.

Average yields on Nigeria’s dollar-denominated bonds fell to 5.93 percent on Tuesday, 2nd February, according to Debt Management Office (DMO) data. That’s a decline by nearly 2 percentage points from the yields of 7.68 percent when they were issued.

This shows an improvement of investor’s risk perception of Africa’s biggest economy, helped by the increase in crude oil prices that has added over $1 billion to Nigeria’s external reserve.

The Federal Government plans to raise N2.3 trillion from external sources to fund part of a budget deficit of N5.6 trillion in 2021.

Foreign Exchange boost

Nigeria’s naira is still a classic petrocurrency whose fate remains intrinsically tied to global oil prices.

A rebound in oil prices is expected to give Nigeria’s naira a reprieve, easing investors’ concern that a steep devaluation may be unavoidable.

Devaluation would lead to increased importation costs for raw materials and other soft and hard commodities that have to be paid for using FX. Raw inputs for manufacturers will become more expensive and ultimate losers will be everyday consumers who will see further erosion in their purchasing power.

On February 3, 2021, the exchange rate between the naira and the dollar closed at N395.50/$1 at the NAFEX (I&E Window) where forex is traded officially.

Data from Central Bank of Nigeria (CBN) showed higher oil prices and steady production output have positively impacted Nigeria’s external reserves, rising sharply to $36.395 million from $35.373 on December 31st last year, translating to a monthly increase of $1.11 billion monthly.

This is a sign that higher oil prices and steady output levels may be contributing significantly to Nigeria’s foreign exchange position.