Rising oil price: The gains, pains for Nigeria

The unfortunate truism that whenever crude oil price is rising, it presents twoway conditions for Nigerian economy is beginning to play out. This is as global oil prices have edged-up to hit the highest mark since March 2020, after encouraging news about a third promising vaccine created hopes of a swift recovery in fuel demand.

On Tuesday, Brent crude futures rose by $0.34 to reach $47.76 a barrel while US West Texas Intermediate (WTI) futures were up by $0.38 to touch $43.43. The highest levels traded since early March before Saudi Arabia announced a price war with Russia, which resulted in a crash of oil prices.

While a higher oil price translates to higher revenue, it also means if the Federal Government’s pricing template is anything to go by, Nigerians may have to brace up for an increase in the pump price of fuel in December.

This is going to add more financial burden on Nigerians who are already complaining of the high cost of petroleum products, which has negatively impacted on the price of goods and services.

The macros driving crude oil bulls to such gains include reports that coronavirus vaccine candidate might likely tame the rising COVID caseloads, coupled with U. S. President- elect Joe Biden going ahead to begin his leadership transition.

Rystad Energy head of oil markets Bjornar Tonhaugen said the thought of starting a vaccination campaign already within 2020 revitalised trader hopes that oil demand could take a little less time to recover.

“As oil demand is currently expected to take a hit from the second global round of lockdowns, the early vaccine news are offer some light in the tunnel,” Tonhaugen said in a note.

Also helping to ease uncertainty in financial markets, President Donald Trump on Monday allowed officials to proceed with a transition to Joe Biden’s incoming administration, giving his rival access to briefings and funding even as he vowed to persist with efforts to fight the election results.

Traders also focused on a week of technical meetings by Organisation of Petroleum Exporting Countries (OPEC) and its allies to prepare the ground for next week’s ministerial gathering, which is set to discuss extending oil output curbs into next year due to weak demand amid a second wave of Covid-19.

Nigeria, like other oil-producing countries, is suffering from a double economic recession linked to the coronavirus and falling oil prices. Falling oil prices and demand for oil, along with a new OPEC contract to cut production, which Nigeria has yet to fully meet, have weakened the Nigerian government’s revenues more than any other major source.

“Higher oil price is good for our foreign currency revenues and overall fiscal revenues. It is also good for our current account balance and balance of payment which apparently dovetails into stability for the naira,” Charles Akinbobola, analyst Sofidam Capital said.

Africa’s biggest oil producing country needs the oil price to rise and in the worst case, remain steady at any price above the $40 benchmark of the 2021 budget.

To achieve this, the country needs to avoid disruptions in crude production and also hope that the alliance under OPEC achieves its objective, even though many are yet to comply with the output cut, including Nigeria.

Nigeria depends on oil sales for around 60percent of its revenue and 90percent of its foreign exchange earnings, though it only accounts for less than 10percent of GDP, according to the International Monetary Fund (IMF).

Weak oil prices amid falling global demand plunged Nigeria’s foreign exchange reserves to $35.63 billion, the lowest in two months, the Central Bank of Nigeria’s latest data has shown.

After reaching as high as $45 billion in June 2019, the reserves have been on a downward trajectory since then. Declining to $38 billion earlier this year before plunging to $35.69 billion on October 28 from $35.74 billion on September 30, 2020.

While rising oil prices are welcomed by oil producers, consumers might not be that excited as higher crude price mean potential increase in petrol pump price.

The general tendency is that when oil price falls, consumers are happy while producers are unhappy.

Petrol prices have risen in Nigeria after the oil-rich nation dumped a controversial petrol subsidy system in the face of a coronavirus budget crunch.

The cost of fuel at the pump has risen by around 15percent in recent days, hitting a record high of N162 per litre ($0.42), after the government pushed on with deregulation.

“In a virtue of one month the fuel price was increased twice, it’s sad and disheartening, honestly it’s not encouraging,” said Martins Odion, military personnel.

“It is we the poor masses that are suffering, they don’t feel anything about it, theirs is to remain in their house and they will supply them.”

People in Africa’s most populous country, where almost half of the 200 million population live in extreme poverty, have for years relied on the artificially inexpensive fuel.

Nigeria is Africa’s biggest crude producer but has almost no working refinery capacity and the authorities have spent tens of billions of dollars to subsidise imports.

But the government says it cannot afford to subsidise petrol any more as the coronavirus pandemic batters the economy.

Nigeria said it would end to the subsidies earlier this year, as falling oil prices robbed Nigeria of a major chunk of its revenues.

Increasing the pain for average Nigerians, the government has also almost doubled the cost of electricity from 33 to more than 60 naira per kilowatt.

President Muhammadu Buhari defended the increases, saying they were “crucial decisions” because of dwindling revenues.

“There is no provision for fuel subsidy in the revised 2020 budget, simply because we are not able to afford it, if reasonable provisions must be made for health, education and other social services,” he said in a statement.

“We now simply have no choice”.

Nigeria’s economy contracted by 3.6percent in the second quarter due to the impact of the coronavirus pandemic and low oil prices while galloping inflation, which the central bank expects to rise to 14.15percent by the end of the year, is increasing costs for businesses and their

While rising oil prices are welcomed by oil producers, consumers might not be that excited as higher crude price mean potential increase in petrol pump price