After recording a 50.5% annual gain in 2021, the global crude oil benchmark, Brent beats its 7-year performance as it crosses the $90/barrel line and is currently trading at $93.15 per barrel, its seventh-week consecutive gain, at the time of writing.
The bullish run-in crude oil is being spurred by demand and supply factors and weather and geopolitical dynamics such as the Russia-Ukraine conflict. Crude oil has outperformed various forecasts by analysts and leading investment banks. For example, a leading global investment bank, Morgan Stanley, predicted that Brent Crude oil could hit $90 per barrel in the third quarter of 2022 but it has taken only 6 weeks for crude oil to beat this estimate.
Brent Oil prices rose to $93/barrel as at 5:00 PM on Friday after a winter storm in Texas, United States disrupted crude oil production. Not only will the rising crude oil prices put pressure on inflation, driving up prices of food and other items like fertilizer, gasoline and diesel prices that serve as raw materials in the production process. Also, higher oil prices could keep global inflation very high in 2022 amidst disruption in global supply chains, shortage of oil truck drivers and strong consumer demand.
What is Driving Crude Oil Prices?
- The strong recovery in global economic activities from covid-19 pressures despite the latest variant “Omicorn” increased global fuel demand as manufacturing activities and service delivery continue to recoup pandemic losses. The increase in demand for energy by businesses and households continues to put pressure on crude oil prices
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- Limited production capacity such as the inability of OPEC+ to meet its current production increase of 400,000 barrels per day, disruption in Libyan output and the decline in US Crude Oil WTI inventories. For example, the winter storm in Texas is behind the latest oil price rally, after disrupting production outages in the Permian Basin, the largest U.S. shale production site
- The slight weakening of the US dollar makes crude oil more affordable for holders of foreign currencies seeking to buy with the US dollar upon converting their local currencies to the USD.
- Geopolitical tension is also a major factor contributing to supply risks. For example, the tension between Ukraine and Russia has contributed to a rise in crude oil prices in the past week due to the possibility of supply chain disruption. Currently, Russia supplies a lot of oil and gas to the rest of the world, between 30% to 40% of Europe’s oil, gas and coal; this supply that could be cut off if tensions with Ukraine escalate to the point of an invasion. The invasion of Ukraine would surely trigger economic sanctions from the U.S. and its European allies. That could lead to oil and gas shortages around the world and, most likely, higher energy prices.
Earlier, Kazakhstan protests over the removal of fuel subsidy and the decision to reduce crude oil supplies to tackle rising fuel prices locally have contributed to supply imbalances in the crude oil market.
Implications for Nigeria
Rising oil prices mean more income for Nigeria but not necessarily better macroeconomic performance or an improvement in the economic foundations that drive growth. Increased income from crude oil exports would be sucked by fuel subsidy which is expected to rise to N150 billion per month. The Central Bank of Nigeria will also have more foreign exchange to prop up the value of the naira, an ultimately unsustainable and harmful endeavour.
