The five-month high record of global oil price fuelled by rising political tension in Libya, US sanctions against Iran and Venezuela, coupled with OPEC’s ongoing supply cuts, is not sustainable, industry sources say.
Oil prices rose to a fresh record at $71.32 a barrel, on Tuesday, around 5:18am local time, the highest since November 2018.
The West Texas Intermediate (WTI) or the US crude also hit a high going back to November 2018 at $64.79.
“The rally will be for a short term. If any of the major factors changes, prices will crash again,” Ayodele Oni, Partner, Energy Practice Group, Bloomfield Law Practice, told BusinessDay.
The new record of the global oil price surpasses Nigeria’s budget benchmark by $11 considering it is pegged at $60 per barrel.
Calculation by BusinessDay revealed that with the current oil prices Nigeria could be saving $11.7 million in a day in its excess crude account.
This was calculated by multiplying the estimated daily production level of about 1.7 million barrel per day by the addition $11 to the global oil price.
According to Wunmi Iladare, Ghana National Petroleum professor and chair, University of Cape Coast, Institute of Oil and Gas, the factors pushing the price of oil as of now are the geo-political turmoil in the various countries involved.
“Oil production has not come down neither has the economic growth picked up where oil and gas are consumed. So I am not going to really put much weigh on the current dynamic beyond, the geo-politics of oil and gas suppliers,” Iladare said.
He added that the oil rally is only for short term, “as there is no high demand for petroleum products, and so nothing has really changed.” He added: “Oil prices in situations like this get to its peak and go down faster that it goes up.”
According to industry sources, other factors that fuelled the rally are the fact that US shale production has slowed down, the Venezuelan chaos persists and most recently, the rising political tension in Libya.
The escalating fighting in oil-rich Libya threatens to disrupt exports in the country and is fuelling concerns over further supply cut.
Resurgence in fighting around the Libyan capital of Tripoli this week has driven US forces to pull out of the country and is providing a new upside risk to global oil prices, underscoring the OPEC producer’s importance to markets and the fragility of its supply.
Rebel forces loyal to renegade Khalifa Hifter, a General who effectively controls the country’s breakaway east, launched a surprise offensive against the home of Libya’s UN-recognised government last week in a move that risks plunging the country back into civil war.
“Any fresh signs of world growth cooling or global supply outpacing demand may end up dragging prices back below the $70 per barrel level, Lukman Otunuga, FXTM Research Analyst told BusinessDay.
Industry sources pooled in a BusinessDay survey however advised that Nigeria should save its excess fund from the high oil prices for the raining days.
“I will not expect Nigeria to start tweaking with the budget at a higher oil prices than what they already have. In fact, Nigeria should take advantage of such peak oil prices and save it for the raining days,” Iladare.
While higher oil prices mean more foreign exchange earnings for Nigeria and available revenue for budget funding, Africa’s most populous nation may have to worry about subsidising the cost of its imported refined petroleum products.
Research by BusinessDay revealed that when there is rally in oil prices, the prices of refined petroleum products also follow in line. This means Nigeria government may be paying more subsidies than it did some months ago.
“Indirectly everything you gain from higher crude prices, you may lose by subsiding the imported petroleum crude product,” Iladare explained.
Another industry source also stressed on the Need for Africa’s largest exporter of crude to position its economy away from oil volatility.
“When considering how robust production from US Shale and concerns over slowing global growth could create headwinds for oil down the road, Nigeria still needs to break away from oil to derive growth from other sustainable sources,” Otunuga said.
In 2016, Nigeria witnessed its worst recession in 25 year, fuelled by the drop in oil prices and cut in oil product but exited in Q2 2017 after 5 consecutive quarters of contraction.
Oil prices declined by 0.45 percent at around 12 noon, local time on Tuesday as one barrel was sold at $70.78.
