Brent, the benchmark for Nigeria’s crude oil, extended its rebound on Monday, hitting the $60 per barrel mark for the first time since the global oil market recorded its worst-ever crisis triggered by the deadly coronavirus.
Brent, against which Nigeria’s oil is priced, increased by $0.76 to $60.10 per barrel at 7pm Nigerian time on Monday, its highest level since January 23, 2020, while the United States West Texas Intermediate rose by $0.68 to $57.53 per barrel.
“The biggest driver for the latest surge in prices seen through last week was a sharp upturn in expectations for economic and oil demand recovery on signs that the coronavirus may finally be in retreat,” Vandana Hari, founder of Singapore-based oil markets data firm, Vanda Insights, told the BBC on Monday.
The above development is expected to be a psychological boost to Africa’s biggest economy who has suffered from collapsing oil revenue, weakened currency and a worsening fiscal deficit, all thanks to a combination of in-house policy mismatch and coronavirus outbreak.
The COVID-19 crisis came with a pounding for economies like Nigeria’s where rising budget deficit and the resulting massive borrowing have shot debt service bill to a crushing 25 percent of annual appropriation.
For most analysts, a rebound in oil prices is expected to give Nigeria’s naira a reprieve, easing investors’ concern that a steep devaluation may be unavoidable.
“Nigeria’s naira is still a classic petrocurrency whose fate remains intrinsically tied to global oil prices,” Gbolahan Ologunro, a senior research analyst at Cordros Securities Limited, said.
On February 8, 2021, the exchange rate between the naira and dollar closed at N397.50/$1 at the NAFEX (I&E Window) where forex is traded officially.
Data from the Central Bank of Nigeria (CBN) show 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 31, 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,” Ologunro said.
Some analysts say Nigeria also needs the external reserves to hit $40 billion if it is to adequately meet some of the pent-up demand that has piled up since 2020, when oil prices crashed and the pandemic caused major economic lockdowns.
“We think an above $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.
The news of higher oil prices is also expected to grant relief to Nigeria’s 2021 budget with Africa’s biggest economy expecting to borrow an unprecedented N5 trillion this year.
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).
Nigeria is expecting an oil earnings of about N2 trillion to finance its N13.588 trillion 2021 budget.
Also, the upturn in global oil prices has again brought to the fore industry concerns over the non-implementation of the full deregulation of the downstream petroleum sector, as the pump prices of petrol have been left unchanged for more than two months.
Crude oil price accounts for a large chunk of the final cost of petrol, and the country has continued to spend so much on petrol imports for many years amid low domestic refining capacity.
Aside Nigeria, the rising oil price is good news for the global energy industry laid low by the demand-sucking pandemic.
“The recovery is proceeding at a faster rate than people perceived,” said Ed Morse, head of commodities research at Citigroup Inc. “The demand recovery is going to look stellar. The inventory draw is significantly greater than what many people thought.”
For countries like Nigeria, Iraq and Angola, which have sought aid from the International Monetary Fund to quell economic crises, it is a lifeline. Even wealthier exporters like Saudi Arabia consider the extra revenue crucial.
Demand has been rising in parts of the world, particularly Asia. “We are quite optimistic about what it is that we are seeing in China,” Royal Dutch Shell chief executive Ben van Beurden said last week.
Other factors have also played their part to push up prices such as efforts by oil-producing nations, particularly Saudi Arabia, to limit output.
Since agreeing to the cut in production last April, producers have held back a cumulative 2.1 billion barrels of oil, leading to decreasing stockpiles.
The coronavirus crisis has been devastating for the petroleum industry, and last year prices slumped below zero with more than one billion surplus barrels.
