It’s mixed fortunes over rising crude price

Rising oil price improves the prospects of Nigeria’s budget implementation but it may also stoke inflation and increased hardship on the average Nigerian, in a delicate balancing for a country whose major export is crude oil and import is refined petroleum products.

Oil prices spiralled to three-year high above $85 per barrel at the weekend, driven by supply deficit forecasts and expected increase in demand over the next few months.

The economy is heavily dependent on the oil sector, which accounts for over 95 per cent of export earnings and about 40 per cent of government revenues. Recent data showed that the Nigeria’s oil sector contributed about nine per cent to the country’s Gross Domestic Product (GDP).

The International Energy Agency has said energy crunch is expected to boost oil demand by 500,000 barrels per day (bpd), which could result in a supply gap of around 700,000 bpd through the end of this year, until the Organisation (OPEC) of the Petroleum Countries and allies, together called OPEC+, add more supply, as planned in January 2022.

Experts agreed at the weekend that the global oil situation presents a mixed-fortune for Nigeria with the expected gains in higher expert earnings counterbalance by downside risks to the domestic economy, which also depends heavily on petroleum importation.

The Central Bank of Nigeria (CBN) stated that Nigeria spends almost 40 per cent of its foreign exchange (forex) earnings on importation of petroleum products and petrochemicals.

Finance and economic analysts at the weekend pointed out the subtle threat of imported inflation due to weak currency and rising consumer prices, despite the continuing decline in inflation rate. The National Bureau of Statistics (NBS) at the weekend released its September 2021 Consumer Price Index (CPI) showing that headline inflation rate moderated for the sixth consecutive month to 16.6 per cent last month as against 17.01 per cent in August, this year.

The decline in the headline inflation rate was meanwhile driven by 74 basis points decline in food inflation rate to 19.6 per cent. A month-on-month breakdown however showed that headline inflation rate inched up by 13 basis points from 1.02 per cent in August to 1.15 per cent last month.

The positive global outlook for crude oil reinforces Nigeria’s medium term expenditure and economic development plan. Nigeria’s 2022-2024 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), which provide the framework for yearly budgets, pegged daily crude oil production at 1.88mbpd; 2.23mbpd and 2.22mbpd for 2022, 2023 and 2024 respectively. The benchmark crude oil price for national planning is set conservatively at around at $57 per barrel, providing headroom for excess crude accounts.

Senior Research Analyst, FXTM, Mr. Lukman Otunuga, said the explosive appreciation in oil is double-edged as bad news for energy consumers and a welcome development for energy-producing countries. But in the case of Nigeria, it comes with a complication as government fixes the price of gasoline for consumers below the international prices and uses its own funds to pay for the difference.

“One thing to keep in mind is that Nigeria exports crude by imports all by-products of the resource, including the most premium motor spirit. With Africa’s largest economy consuming more than its refineries can produce, it depends heavily on importation for its energy needs which has recently jumped to over 70 million litres per day.

“Ironically, rising international oil prices will put more pressure on the country’s foreign exchange while the revenues from oil sales may be drained by the fuel subsidies. According to data from the Nigerian National Petroleum Corporation (NNPC), the cost of petrol subsidies may hit N1 trillion by December if oil prices continue to rally. This will impact the government’s ability to fulfil its financial obligations and may even impact the recently approved 2022 budget,” Otunuga said.

According to him, higher petrol prices have fueled fears over rising inflation which could hit disposable income and impact economic growth.

“The horrible combination of rising inflation and slowing growth continues to fan concerns over stagflation. Removing fuel subsidies is likely to expose Nigeria to such risks. Another question is the socioeconomic consequences of such a move.  If Nigeria had a chance to remove the subsidies, this could have been when oil prices trading at record lows last year. Fast forward today, oil bulls are on a tear with the fundamentals propelling prices towards $100 – a level not seen since 2014. To remove the subsidies now, may result in spiralling inflation but keeping them active continues to drain the government coffers,” Otunuga added.

Analysts at Afrinvest Securities at the weekend said though they expected the headline inflation rate to further moderate this month to 16.0 per cent on high base-year effect, “risks to the outlook include further increase in the cost of energy commodities-noticeably, diesel and gas, and renewed pressure on the exchange rate”.

Cowry Asset Management Limited had noted that the “sustained rise in month-on-month inflation was partly due to sustained foreign exchange volatility; thus impacting input costs of businesses which was passed onto consumers in the form of higher selling prices”.

“Hence, we feel that annual inflaition rate may rise in the coming months, especially during the festive season, although to a limited extent due to expected increase in food supply on account of the ongoing harvest season,” Cowry Asset stated.

Analysts at Cordros Capital said while they expected food prices to moderate this month, given the impact of the primary harvest season, the impact of currency weakening and higher transportation costs may stoke upward pressures in the core basket.

“Accordingly, we look for month-on-month headline inflation reading of 1.27 per cent in October, with the high base effect from the corresponding period of 2020 translating to 30 basis points moderation in yearly headline inflation to 16.32 per cent,” Cordros Capital stated.

Bismarck Rewane’s Financial Derivatives Company (FDC) stated that the principal inflation moderating factor was the base year effects, pointing out that a notable trend however was that core inflation-inflation less seasonalities increased by 0.33 per cent to 13.74 per cent while month-on-month inflation also increased.

ing sold at N350 per litre and commodity prices are surging? When will the domestic inflation rate finally reach an inflection point? These are some of the pertinent questions on the mind of most analysts and investors,” FDC stated.

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