Mixed Implications of Oil Price Rally


Thursday, June 03, 2021 / 1:11 PM / by FBNQuest Research / Header Image Credit:  Oilprice

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Crude oil prices rallied to their highest levels since the pandemic began after OPEC and its non-OPEC partners (OPEC+) agreed on Tuesday to gradually ease production cuts. In accordance with its decision in April '21, the output boost will be maintained at c. 2.1 million barrels per day (mbpd). Following the OPEC+ meeting and the cartel's optimism about the demand-supply balance, the price of UK Brent crude strengthened further, rising by c.3% to close at over USD71/b. The cartel did not agree on a production plan beyond July. As such, the group's next meeting has been slated for July 1.


Although the oil sector accounts for less than 10% of Nigeria's GDP, its indirect linkages to GDP is estimated at close to 40%.  While its contribution to the federal revenue purse fell to c.56% in 2020 due to the pandemic, it is typically in the 80-90% range in a good year.


The OPEC+ decision and the ensuing rally in oil prices are broadly positive for Nigeria with respect to revenue accretion, its external reserve position, balance of payments and exchange rate. It may also bring about renewed confidence from the offshore investment community whose confidence has been badly eroded by the fx liquidity challenges of recent years and the country's challenged macroeconomic position.


The price of gasoline (premium motor spirit) at retail pumps is still subsidised by the Nigerian government. Consequently, a downside from elevated crude oil prices is that it will add more pressure on government's fiscal position as long as the subsidy situation is unchanged.


The Nigerian National Petroleum Corporation's (NNPC) recent action to deduct subsidy payments amounting to over NGN112bn from its May '21 remittance to the Federal Accounts Allocation Committee (FAAC) puts the scope of the fiscal constrain into some perspective. In the light of dwindling revenues, the Governors of the 36 states of the Federation have jointly voiced their support for a full deregulation of gasoline prices


Although the nation has a long term production target of c. 4mbpd, production has been stuck between 1.5mbpd and 2.mbpd. The major culprit is the lack of investment by the oil majors due largely to the non-passage of the petroleum industry bill. The bill has been mired in politics and stuck in the national assembly for over a decade. Before its latest bid round, the Department of Petroleum Resources (DPR) had not held a bid round since 2003. This has not stopped it from having bilateral agreements with various parties.


The NNPC's recent renewal of the Oil Mining Lease 118 (Bonga) with the local subsidiaries of Shell, Total, Exxon, and Eni for another 20 years will result in revenue of USD780m and unlock over USD10bn worth of investments. The DPR's recently concluded bid round for marginal oil fields is expected to earn the government over USD500m in signature bonuses.


The overarching goal for Nigeria is to diversify the government's revenue base away from oil. The Dangote Group's soon to be completed refinery might help relieve some of government's burden with respect to fuel imports. The NNPC's recent announcement that it intends to acquire a 20% stake in the refinery aligns with its import reduction objective.


While the oil price increase is supportive (reserves and the exchange rate), the potential impact on fuel prices is likely to feed into concerns about inflation which remains elevated. That said, we do not expect the oil price development to have any meaningful impact the thinking of the authorities with respect to monetary policy.

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