While several analysts expected that a sudden rally in crude oil prices will translate to a breather for Nigeria’s currency in the wake of higher crude oil prices, the complete opposite occurred in the market during the past week.
“Typically, the correlation between crude oil prices and USD to Naira is negative, such that as crude oil gets higher, you will expect that Naira will become stronger and cost less to buy in the market. But what we saw last week was something different. Crude oil prices were rising but Naira was getting weaker. It was quite puzzling,” said Jeremiah Ejemeyovwi, a Lagos based Economist.
The crude oil market saw one of its most eventful weeks since the oil price crash of 2015. Crude oil prices saw one of its biggest one day spike on record after drone attacks on state oil company Saudi Aramco’s Abqaiq crude processing plant and a plant in the Khurais field was expected to reduce Saudi Arabia’s oil production capacity by around 5.7m barrels per day for at least a week. The affected processing plant produces around 5% of the global oil supply.
The Brent crude oil price rose about 15 per cent immediately, peaking at $69, at the end of Monday before declining to around $64 on Friday which was still about 7% higher than it closed at just 7 days earlier.
In a surprise twist of events, as crude oil prices rose, Naira got weaker and as crude oil prices began declining later on in the week, the trend reversed, and Naira began to appreciate in value once again. Nigeria which is one of the largest oil exporting nation is expected to be one of the biggest beneficiaries of the rise in crude oil prices as public finances were already poorly positioned due to crude oil prices trading at $60 per barrel which is the oil price benchmark of the country’s budget.
Nigeria anticipated daily crude oil production of 2.3mbpd but has struggled to reach this volume all year long as the country has heavily depended on crude oil prices trading well above the benchmark price to ensure that the budget deficits do not grow any bigger. Crude oil earnings contribute more than 70% of Nigerian government revenue and up to 93% of the country’s export earnings, making the sector the most critical in the Nigerian economy.
“If higher crude oil prices can’t make Naira stronger, it’s not hard to imagine that investors are not just avoiding Naira completely as their devaluation fear factor is rising due to the numerous economic reports pointing at Naira as being overvalued,” said Obinna Uzoma, Chief Economist at EUA Intelligence.
