October 6, 2021/CSL Research

In the past week, the crude oil market has continued to gain momentum, as both Brent and West Texas Intermediate recorded an average of 5.1% rise in benchmark prices to US$82.52 and US$78.84 per barrel, respectively. The spike in prices has fed off so many factors, with the predominant ones being the improved demand following the anticipation of winter, the energy concerns in Europe, and the improving world vaccination prospect amidst a continued control of supply of the commodity in the international market. At its most recent OPEC+ meeting, the cartel and its allies agreed to keep supply at current levels.

The onset of the coronavirus pandemic in 2020 resulted in a slump in global demand for energy, which caused a significant decline in oil prices (BRENT and the West Texas Intermediate) to an all-time low. This prompted the institution of production cuts by OPEC+ to support prices. Despite increasing crude oil prices however, Nigeria’s external reserves has not shown any significant growth. We believe this is due to the technical and operational concerns that have hampered volume growth in recent months. According to a report in August, the country produced only 1.27mbpd of crude compared with Nigeria’s ex-condensate production level of c. 1.6mbpd.

Rising oil prices should bode well for the Nigerian budget, given its benchmark price for crude oil for the 2021 fiscal year is pegged at US$40/bbl. The Group Managing Director of Nigerian National Petroleum Corporation (NNPC) Mele Kyari however noted that the rise in oil prices is hurting Nigeria, which relies heavily on fuel imports for its needs. An increase in oil prices implies an increase in the price of petrol which currently implies an increase in subsidy reported as losses in the books of the NNPC. Fuel subsidies have been reported to cost the country up to N120 billion naira monthly.

While the continued recovery in global economies and current events portend an increase in crude oil demand, downside risks still exist, and we continue to reiterate our agelong clamour for economic managers to adequately diversify the country’s export earnings particularly exploring opportunities in mining and agriculture.