Oil Price Punches above $90 per Barrel; a Win or Lose?

For the first time since 2014, oil prices rose to $90 per barrel. We attribute this rise to concerns about supply disruptions caused by geopolitical tensions in the Middle East as well as the Ukraine-Russia face-off. Furthermore, demand-supply imbalance has also supported the rise as reopening of economies fuel demand recovery amid the inability of OPEC+ countries to keep up with their production quota. Another factor driving higher prices is OPEC's squeezed spare capacity, which has suffered from underinvestment. Stakeholders are less interested in investing in drilling and explorations activities due to the shift towards greener energy. Additionally, low levels of supply have put a strain on crude inventories, which will inherently increase future demand to replenish depleted reserves.

In terms of its global impact, rising oil prices may exacerbate inflationary pressures. According to the International Monetary Fund (IMF), inflation could remain elevated in 2022, averaging 5.9% in emerging markets and 3.9% in advanced economies. We are privy to the negative impact COVID-19 had on the global economy, where the economy slipped into a recession, and on resumption of economic activities, countries reached record high inflation numbers. The aftereffects have also triggered the ongoing monetary policy normalization in an attempt to moderate inflation. However, while we anticipate that the increase in oil prices could exacerbate inflation in non-oil-producing countries, this might be a bright spot for oil-producing countries that are well-positioned to capitalize on this rise. Will Nigeria be one of the beneficiaries?

Let's take a look at what this means for Nigeria's economy. On the surface, one might assume that as an oil-producing country, the elevated level of oil prices could support budgetary needs, especially with a relatively lower budget benchmark of $62/barrel. However, the country's peculiarities and production bottlenecks do not necessarily position it to benefit from this development. Production remains modest, and the country is still reliant on refined petroleum imports. Although new and old refineries are in the works, they are not yet operational. As a result, the gains from higher oil prices are subsumed by high subsidy payments, with states having less to receive from the centre. The decision to delay subsidy payments could result in higher fiscal deficit despite the soothing impact on consumer prices. In addition, sub-nationals could resort to debt to fund their operations.

In the near term however, we expect crude oil prices to remain elevated as demand strengthens and cartel efforts cap supplies. Should geopolitical tensions ease, we could see some retracement in oil prices, however, climate change concerns could fuel further under-investment in fossil fuel. Nigeria could benefit in the medium term as refineries come on stream in the current decade. Replacing petroleum imports with local refining could create room for the removal of fuel subsidies and free up capital to address local developmental needs.