Oil Price Sustains Rally: Potentially A Double-Edged Sword For Nigeria

Nigeria's Oil Reserves Lose 600 Million Barrels In Three Years-Brand Spur Nigeria
Nigeria's Oil Reserves Lose 600 Million Barrels In Three Years-Brand Spur Nigeria

The crude oil market’s resurgence was sustained in yesterday’s session as Brent crude and WTI crude gapped higher to close at $61.47/bbl. and $58.68/bbl. respectively, extending gains into the longest run in 2 years.

While crude oil had started to rally last week, investors’ sentiments were bolstered by data from the American Petroleum Institute (API), which showed that US inventories fell by 3.5m barrels previous week (for the 8th time in 9 weeks) as against a forecast build of 985,000 barrels.

Energy Stocks Soar And Oil Prices Climb

While concerns continue to linger on stricter restrictions to curb the spread of developing Covid-19 variants, markets have found solace in the decent improvement in vaccination levels.

Bringing the story home, we reflect on this rally as a strong positive for the Nigerian economy. First, the rally in crude price bodes well for the country’s FX reserves even as production is expected to remain in a lull.

We expect better pricing to improve crude oil receipts and consequently bolster CBN’s FX inflows. As a result, we expect this would have a positive knock-on effect on improved I&E window intervention by the CBN and consequently, exchange rate stability.

Furthermore, we believe this is positive for the Federal government’s revenue projections. With the 2021 budget built on an oil price benchmark of $40/bbl., the recent rally boosts the government coffers and its ability to meet its oil revenue target.

On the downside, we note that prolonged high crude prices would ultimately feed into a climb in petrol’s landing cost. Thus, with the Federal government likely to insist on deregulating the downstream oil & gas sector, the price of petrol paid by Nigerian consumers is expected to surge.

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Consequently, this would weaken consumer purchasing power while aiding further surge in the inflation rate.