Global oil prices have jumped since fighting erupted between Israel and Hamas amid speculation about how the conflict could affect energy production in the Middle East, a development that may have implications for Nigeria, Africa’s biggest oil-producing country.
On Wednesday, Brent, the benchmark for Nigeria’s crude oil, stood at $86 per barrel, up 3.2 percent since the war started. West Texas Intermediate, its US counterpart, rose 4 percent to $84.15.
“With the Israeli government warning of a long and difficult war, there are concerns that deep and incessant retaliatory strikes on Gaza could potentially bring Iran into the conflict and have an impact on the flow of energy in the region,” Susannah Streeter, head of money and markets at Hargreaves Landsdown, wrote in a note.
Israel formally declared war on Hamas Sunday after the Islamist militant group launched its deadly surprise assault Saturday.
More than 1,000 people have been killed in Israel, and more than 900 Palestinians have been killed.
Israel is not an oil producer, but there are concerns the conflict could trigger wider uncertainty in the region and lead to tougher enforcement of sanctions on oil from Iran, whose foreign ministry backed Hamas’s actions as an act of self-defence.
Adding to the uncertainty, Israel suspended production at its offshore Tamar gasfield, sending European gas futures prices about 13 percent higher.
Analysts said the conflict could also complicate efforts by the President Joe Biden administration to broker a deal with Saudi Arabia to normalise ties with Israel, which could also affect the kingdom’s willingness to raise its oil output.
“The Israeli government is vowing an unprecedented response and it is hard to envision how Saudi normalisation talks can run on a parallel track to a ferocious military counteroffensive,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.
Pierre Andurand, a hedge fund manager who specialises in energy trading, said that while there was little immediate threat to supplies, the market could tighten.
“Over the past six months we have seen a very large increase in Iranian supply due to weak enforcement of sanctions,” he wrote on social media platform X, formerly Twitter. “There is a good probability that the US administration will start enforcing those sanctions on Iranian oil exports more tightly.”
Likely implications for Nigeria
If the ongoing conflict between Israel and Palestine escalates further, setting off a chain reaction, Nigeria, yet to recover from the economic crisis that followed the invasion of Ukraine by Russia, may have to deal with another energy crisis that may force the government to either raise petrol prices or spend more on petrol subsidy.
“For Nigeria, it is a major paradox. The attendant shortfall in supply resulting from disruption in production in the Middle East is expected to boost oil supply revenue for Nigeria. But the country can hardly harness those benefits because of the unending limiting factors ravaging the Niger Delta and oil production,” Charles Akinbobola, energy analyst at Lagos-based Sofidam Capital, said.
More than any other country, Africa’s biggest oil-producing country relies on crude oil for most of its foreign exchange and two-thirds of government revenue. Nigeria also needs the oil price to rise and in the worst case, remain steady at any price above its revised budget benchmark of $75 a barrel to feasibly implement its 2023 budget.
To achieve this, the country needs to avoid disruptions in crude production and also hope that the country’s oil production stays at 1.69 million barrels per day (bpd).
Data from the Organization of the Petroleum Exporting Countries showed Nigeria’s crude oil production rose by 100,000 barrels to 1.2 million bpd in August.
Apart from oil, other analysts said the outbreak of military conflict in the Middle East may leave developing economies battling with higher costs of trade as well as deal a blow to economic confidence at a time when they had expressed growing hope about containing the price surge sparked by the COVID-19 pandemic and Russia’s invasion of Ukraine.
“It’s too early to say” what the implications may be, though oil and equity markets may see immediate fallout, Agustin Carstens, general manager of the Bank for International Settlements, said in a presentation to the National Association for Business Economics.
For most analysts, the recent development between Israel and Hamas and related issues will likely vault high on the agenda of global financial leaders gathering this week in Morocco for meetings of the International Monetary Fund and World Bank to take stock of a global economy that remains in a deep state of flux from the pandemic and rising trade tensions.
“For central banks, it poses the dilemma of whether it is likely to lead to new inflation pressures – the Middle East is not just home to major oil producers like Iran and Saudi Arabia, but also to major shipping lanes through the Gulf of Suez – or deal such a blow to confidence that the economy stutters,” Akinbobola said.