Oil prices started off on a positive note 2022, defying experts’ prediction of a ballooning surplus, instead surpassing $90 a barrel in the last week of January. Prices and options contracts invoking the prospect of crude spiralling above $100, the commodity is threatening to intensify the inflationary pain felt by major consumers.
But the rally seems a bad news for refined fuel-hungry countries like Nigeria with the Nigerian National Petroleum Corporation (NNPC) now paying more in petrol subsidy and negatively impacting its contribution to the federation account.
There is a significant worsening of this situation by Russia invasion of Ukraine.
Nigeria, a key OPEC member has also struggled to meet its oil allocation from the producers’ group, with flows of the once-key export grade Bonny Light now trickling out with significant delays. Nigeria is pumping roughly 1.35 million barrels , the lowest figure in years.
Goldman Sachs Group’s head of Global Research, said that only two countries in the world – Saudi Arabia and the United Arab Emirates – can pump more today than they did in January 2020 before the pandemic really hit demand.
“That could see the oil market tighten over the next three to six months,” he said.
Morgan Stanley expects Brent to climb beyond $90 a barrel by the third quarter and estimates that observable stockpiles fell by about 690 million barrels last year.
Now let us look at how this affects Nigeria. As a result of this rise in price, multiple factors will shape the economy’s direction in 2022. Never forget that electioneering activities are on. This and the potential removal of fuel subsidy to be key drivers of implementing economic policies, coupled with economic fortunes regarding inflation and monetary policy. With economic growth likely to be about 1.6% y/y, buoyed by a decent recovery in the oil sector from a two-year-long recession, as an increase in the Organisation of Petroleum Exporting Countries (OPEC)’s production quota and the low base effect will drive growth. There is prospect for sustained growth in the agricultural and services sectors, supported by strong demand for food and improved internet adoption amid the roll-out of the 5G network. On price movement, we should anticipate inflationary pressures to weigh on the market as the high base effect wears off and the true impact of imported inflation reflects on the headline inflation numbers. Government should therefore be very careful with the subsidy issues. Though one needs to understand government’s position in this area-big dialema. An albatross so to say.
With improving demand, tightening inventories, and questions of OPEC’s ability to ramp further, the directional arrows of progress point to further optimism. Movements in the price of oil are felt more keenly and quickly than that of any other commodity because they pass almost immediately into the cost of end-products such as petrol, diesel and jet fuel. Then the cost of transportation and distribution in a country like Nigeria without functional public transportation that is pocket-friendly
While Nigerians wait with apprehension for the planned removal of subsidy in the year, there were riots across Kazakhstan after the government there allowed the price of liquefied petroleum gas – a key road fuel – to surge. There is a possibility of this in Nigeria if government removes subsidy on petrol. It is therefore incumbent on the government to disregard those calling on it to remove fuel subsidy. Rather, it should concentrarate on diversifying the economy while working towards attaining local refining capacity.
The dynamic means prices will be monitored closely by central bank of Nigeria that is trying to keep a lid on inflation while at the same time fostering economic growth as nations emerge from the Covid-19 pandemic.
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