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As election approaches, the rising price of crude oil is a double-edged sword that holds mixed fortunes for the Nigerian economy as Brent the benchmark oil price surged beyond $75 on Monday, its highest since November 2014 as traders braced up for a possible re-imposition of US restrictions on Iran, the third-biggest producer in the Organization of Petroleum Exporting Countries (OPEC).
The price rally could boost Nigeria’s revenue, grease the foreign exchange market, give new life to banks’ non-performing loans and encourage the restart of oil drilling, analysts say.
However it could also translate to higher petrol prices in import dependent Nigeria, and blunt the hunger for badly needed reforms to break decades-old dependence on oil.
“Obviously, the higher oil price will lead to higher subsidies on government, the NNPC will be incurring more losses of about N2.3 billion; since we are in elections periods, it’s very rare for the government to make any serious change,” Ademola Adigun, an oil and gas governance consultant said.
In Nigeria, the government has justified arguments on why it needs to sustain a duplicitous subsidy regime that is costing the country billions.
With landing cost of petrol put at N171 per litre, the Nigerian National Petroleum Corporation (NNPC) incurred N37 on each litre of fuel at a depot price of N133.80, leading to a daily subsidy of N2.046billion for 55million litres.
“We are actually subsidising for the almost the whole of West Africa in real terms, because we are currently paying subsides for about 53 million daily when our current consumptions is around 36.8 million,” Adigun said by phone.
The landing cost of petrol has been higher than the government regulated price of N145 per litre, since crude oil prices rose to $45 per barrel in January 2017. This puts total subsidy spends since February 2017 to February this year at N746.79billion. Analysts say there is no better manual on how to self-destruct an economy.
All attention will be on US president Donald Trump this week, who is facing a fateful decision (May 12) on whether to keep waiving nuclear-related sanctions on Iran or to rip up the Iran nuclear deal.
“The US government has said it is open to renegotiate a new deal in place of the current one, Iran is opposed to changing any aspect of the deal, resulting a standoff that is almost certain to derail the deal and send crude oil price into rally frenzy,” Ecobank energy research analysts said in a report on May 7.
Renewed US sanctions on Iran may disrupt more than the Persian Gulf nation’s oil exports; Iran holds the largest proven reserves of natural gas, and its gas and petrochemical industries have continued to grow since sanctions were eased more than two years ago.
“We think the market has been pricing in the almost certain expectation that the US will withdraw from the deal. While confirmation of the withdrawal will be positive for crude oil price and will likely be followed by a sudden rally in crude oil price, we believe the magnitude of the rally will be moderate,” Ecobank energy analysts said.
Energy Analysts at Ecobank also expected a significant decline in on the off chance that the US government decide to recertify the deal.
“This is likely to trigger profit taking by speculators including hedge funds that has taken a bet on the US decision resulting in higher crude price; with our expectation of US government failing to recertify the deal in mind, we expect price to trade within $72 to $80 range during the week,” Ecobank energy analysts said.
British foreign minister Boris Johnson, German chancellor Angela Merkel and French President Emmanuel Macron all lobbied Trump to renew the waiver on US sanctions.
“While European nations are still in support of the deal, the economic impact of reintroduction of sanctions on Iran by the US government means the possibility of the deal remaining after US withdrawal is improbable,” Ecobank energy report.
Iran’s president warned on Sunday that Donald Trump would be making an “historic” mistake if the US were to withdraw from its deal with Tehran, and further warned against a higher oil prices, signalling a split with fellow OPEC member Saudi Arabia, which is showing a willingness to keep tightening crude markets.
“A suitable price for crude is $60 to $65 a barrel; the continuous variation in oil prices is destabilising for future investment and security of supply,” Amir Zamaninia, deputy oil minister for international and commercial affairs, said in an interview on Sunday in Teheran.
However, Zanganeh made no mention of the multiparty nuclear accord that eased sanctions on Iran starting in January 2016, but he warned that the insertion of politics into the energy market will hurt producers and consumers alike.
“We strongly believe the oil market should not be political,” Zanganeh added.
Unlike Iran, Saudi Arabia, the world’s largest oil exporter and OPEC’s biggest producer, is said to want crude closer to $80 a barrel, in part to support the valuation of state energy giant Aramco before its planned Initial Public Offering (IPO).
OPEC ministers and allied producers are scheduled to meet next month in Vienna; the group began reducing oil production last year in a drive to clear a global glut. The curbs have all but eliminated surplus oil inventories, and prices
have crossed a four -year high.
Brent crude was up 1.20 percent to $76.07 per barrel as at 6pm Monday, its highest level since November 2014 ($75.89 per barrel), according to data compiled by BusinessDay and sourced from the Bloomberg terminal.
DIPO OLADEHINDE
