After falling to historic lows after the new coronavirus pandemic hit demand early last year, global oil benchmark Brent Crude is closing in on $60 per barrel for the first time since January 2020.
The price rally is fuelled by OPEC production cuts, declining inventories in the United States and China, and the roll-out of vaccines against the new coronavirus in many parts of the world.
Crude inventories in the world’s two largest economies declined this week, showing a tightening market. “The physical market is also looking increasingly tight,” said Eugen Weinberg, head of commodities research at Commerzbank AG.
The Organisation of Petroleum Exporting Countries and its allies led by Russia, a group known as OPEC+, has kept production cuts in place even as prices rise.
According to the International Monetary Fund, global GDP will grow by 5.5% in 2021. China is set to grow by 8.2%, the fastest in 8 years; the Asian giant is increasing the purchase of wheat, corn, and other commodities which is creating a positive sentiment for commodities demand.
Relief for Nigeria
The recovery in oil prices and positive outlook bodes well for oil-dependent economies like Nigeria, which derives around 90% of foreign exchange earnings and about half of government revenues from oil sales.
The sharp decline in the global crude demand and prices forced Nigeria, Africa’s biggest oil exporter, to slash its record 10.6 trillion naira ($34.6 billion) budget for 2020 as well as lower its oil price benchmark from an initial $57 per barrel to $28.
In the aftermath of last year’s budget financing constraints, Nigeria set its oil price benchmark for the N13.08 trillion ($34.4 billion) 2021 budget at $40 per barrel. With oil prices nearing $60 per barrel, above the benchmark, Nigeria can look forward to financing its budget with a lower fiscal deficit, which hit N6.1 trillion in 2020.
An above $40 Brent price, in addition to being healthy for the 2021 budget revenue projections, means increased export receipts and foreign exchange earnings. Ultimately, the prolonged strength in oil prices would reduce pressure on government reserves and on the need to reform exchange rate management.
For more than three years, the Central Bank of Nigeria has tried to stabilise the exchange rate of the naira to the dollar by selling forex from the country’s foreign reserves, despite the low revenue from oil sales.
Economic experts as well as international lenders including the IMF and World Bank have called for an overhaul of the multiple exchange rate regime but those calls have gone unheeded, and are less likely to for the foreseeable future as external reserves rise – from $34.94 billion in November 2020 to $36.23 billion as of January 21 – on the back of increasing oil prices.
An increase in oil prices also implies an increase in the price of petrol which may either mean a further upward adjustment in petrol prices in Nigeria or a return to the subsidy regime that was supposedly scrapped in 2020.
Nigeria imports more than 90 percent of the petroleum it consumes. So as oil prices rise globally, a gap opens between its fixed domestic fuel price and what the Nigerian National Petroleum Corporation pays to import, which the state-run firm historically has absorbed as part of its cost of operation despite the onerous fiscal burden and structural impact as a block to economic development.
Few analysts predict oil as $60 for 2021. The investment bank Renaissance Capital sees an average oil price of $50. A sustained oil price of $60 per barrel will bring more production to the market, thus lowering prices. Nigeria cannot thus hope for or plan on $60 oil in 2021. Global growth also remains susceptible to the possibility of new strains of the novel coronavirus which existing vaccines may not be effective against.