September 29, 2023/Coronation Research

The oil sector plays a pivotal role in Nigeria’s economy, particularly due to its contribution to FGN revenue. In 2022, oil revenue accounted for 40.7% of total FGN revenue, compared with a contribution of 45.3% in 2021.

However, from a national accounts’ perspective, it currently contributes 5.3% to total GDP and has contracted by an average of -13.7% y/y over the past eight quarters. In Q2 ’23, it contracted by -13.4% y/y vs a contraction of -4.2% y/y recorded in Q1 ’23.

Oil price movements continue to be impacted by the Russia-Ukraine crisis (which has disrupted global energy markets) as well as production cuts by OPEC+. Oil prices began the year at an average of USD80.4/b. In April ’23, select OPEC+ member states (Saudi Arabia, Russia, Kuwait, UAE and Iraq) pledged to voluntarily cut oil production by 1.2mbpd. The drive to tighten supply was once again evident as both Russia and Saudi Arabia in September ’23 agreed to voluntarily extend their oil production cuts till the end-2023. Oil prices surged above USD90/b (the highest recorded this year) on the back of this announcement.

On the demand side, oil prices are poised to remain elevated partly due to relatively strong demand. According to the IEA’s latest oil market report, global oil demand is projected to increase by 2mbpd to 101.9mbpd in 2023 compared with 99.8mbpd recorded in 2022. This growth is expected to be largely driven by improved demand from China after periods of lockdowns. We see oil prices above USD86/b by end-year, partly due to the recent temporary ban on diesel and petrol exports by Russia which could further disrupt fuel supply in the Eurozone ahead of the winter season.

In Nigeria, oil production has continued to record fluctuations largely due to challenges of oil theft and pipeline vandalism in oil-producing areas. According to data from the NUPRC, crude oil production improved to 1.41mbpd in August ’23 compared with 1.30mbpd recorded in July ’23. Additionally, based on local news media, Nigeria recorded a boost to revenue by c.N188bn on the back of crude oil sales in August. However, it is worth noting that oil production remains below OPEC+ approved quota of 1.7mbpd and the FGNs benchmark of 1.65mbpd. Despite the shortfalls prevalent in Nigeria’s oil sector, the commodity accounted for c.79% of total exports in Q2 ’23 (according to the latest foreign trade statistics data from the NBS).

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