Nigeria: Caught in a web

Oil prices are on a tear, along with everything else in this inflationary period. Players in the global oil market are spooked by supply-related constraints, and their continued panic has seen oil prices climb by no less than 20% YTD. While Western oil companies are drilling fewer wells post-pandemic – partly due to pressure from investors and environmental activists and to also avoid over-supplying the market -, outages in countries like Ecuador, Kazakhstan and Libya because of natural disasters and political turbulence have deepened the production gap in recent months. On the other hand, much of the world is learning to live with the pandemic, and while people are eager to commute, many are wary of contracting the virus and are opting for private vehicles rather than shared public transport systems.

The price rally has been good news for oil-producing countries, like Russia, Saudi Arabia, Nigeria, and shale producers in the United States. Countries that depend – to a high degree – on oil to finance their budgets are in better fiscal and external positions, thanks to higher oil receipts. As a result, Angola is being viewed more favourably by Fitch and has been upgraded to B-(Stable). Business is also booming for oil companies, and their stocks have rallied along with oil prices. The Dow Jones and Nigeria’s oil & gas indices are both up 32.9% and 36.3% respectively, YTD.

Unfortunately, every coin has two sides, and the rally in crude oil prices in recent months is no exception. The oil shocks of 1973/74 and 1979/80 are remembered for the disruption and hardship they caused in the major oil-consuming countries. Even today, as oil prices flirt with $100/bbl, the damaging impact of very high oil prices is painfully being re-learnt, painting a different picture in oil-importing countries. The oil rally is evoking pain globally, as it ultimately feeds into petrol’s landing cost. Fuel prices are higher than they have been in a long time for global consumers, and we are all paying more to fill up our tanks.

Also holding the short end of the stick, are some emerging economies whose governments subsidize energy consumption. The reflated subsidy bills will further drag already-stretched government budgets, as it is not a popular vote to embark on subsidies removal when pump prices are purse-pinching consumers. Therefore, as the rally boosts budget implementation and reserves accretion in oil-producing economies, it leaves an inflationary impact through higher fuel prices on oil importers and weakens the fiscal profile of energy subsidizers. Some countries, including India, Angola, and Nigeria are caught between two or more of these dynamics.

While oil prices may have soared, the most immediate and critical factor in the global oil market is the geopolitical risk – following Russia’s military offensive against Ukraine, with threats of military action issued to Finland and Sweden as well. Russia produces roughly one of every 10 barrels used around the world on any given day. In the face of tougher sanctions – targeted at Russian access to foreign currency and hydrocarbon supply -, already-pressured fuel supplies in Europe will be at further risk, crippling much of the continent. More than a third of Europe’s gas supplies come from Russia, and around a third of those supplies are shipped via Ukraine.

Broadly, the prospect of higher oil prices is a double-edged sword being wielded by Russia’s President at this time. While a temporary imbalance in the market could yield some short-term wins for oil exporters, an extended disruption to oil’s global supply chain will have a painful effect on the global economy’s post-pandemic recovery. Oil’s recovery may be a boon for the market’s big suppliers, but its knock-on effects are certainly coming back to bite.