- Saudi Arabia claimed it was hit with a coordinated drone attack on Saturday hitting about half its output. Link
- Yemen was initially blamed for the attack but the US is putting the blame squarely at Iran. Link
- Iran has denied launching any attack but claims it is ready to defend itself should there be an all-out war. Link
- Some people in the US have called for a united response against Iran. Link
- Saudi Arabia claims it could restore half of what is lost in a matter of days but the balance could take weeks to get back to production. Link
- Saudi is now behind the US and Russia as the worlds largest producer of crude oil.
How can Nigeria benefit from this?
- Nigeria can also benefit from a likely increase in its quota of crude oil sales. We currently export on average 1.8mbpd to 2.0mbpd
- Nigeria can increase its revenue from this if the issue persists and oil prices continue to rise.
- Reports already suggest oil price could rise to as much as 19% due to this crisis and its ensuing escalations. Link
- In fact, Brent Crude is already at $71.95 in Singapore up by $11.73
- However, Saudi oil production could be up and running in the short term. Also the US also produces large quantities of oil and could bridge the supply gap.
- Ironically Nigerian and Iraq agreed to production cuts. This latest crisis may keep that decision pending until it is resolved. Link
Forex Pressure is off
- There has been growing pressure on the CBN to consider a devaluation of the naira.
- Those in favour of devaluation often cite the drop in oil prices as a reason as well as the Real Effective Exchange Rate (REER).
- The CBN responded with a series of securities sales at significantly higher prices, a policy aimed at sucking out demand from the market.
- With this crisis probably escalating over the next few days, oil prices may continue to rise impacting positively on Nigerian foreign exchange proceeds.
- The CBN will view this as another reason to continue its defence of the current exchange rate regime.
- Thus, for now, the pressure to devalue is off until things return to normal.
Spanner in the wheel
- One potential downside in all this is Nigeria’s continued funding of fuel subsidy.
- If oil prices rise then Nigeria might have to pay higher for its fuel imports offsetting whatever gains it hopes to get from the temporary rise in oil price.
- Reports suggest Nigeria spends about $5 billion on the importation of fuel.
- Perhaps, if Nigeria already secured enough supplies beyond the crisis period then we may not be adversely affected.
But, it might not last long
- The US has already briefly overtaken Saudi as the world largest crude oil exporter.
- Apart from the US, Iran, Iraq, and Venezuela also have significant spare capacity to fill any gap created by the crisis in Saudi Arabia
- While the situation in Saudi has potential positive consequences for Nigeria, it is not sustainable. We still need to urgently diversify from relying on oil for government revenues.
- The government needs to focus on other mineral exports as well as broaden its tax base. We do not support an increase in taxes of any kind.
- On a positive note, this crisis will keep oil prices stable which has dropped to under $55 from as high as $66 back in April this year.
- Nigeria’s 2019 budget oil benchmark was $60 so government needs oil trade above that price to balance its budget.
- Nigeria earned N1.3 tr from crude oil sales in 2018 compared to N1.2tr budgeted and N2 trillion in 2017. So higher oil prices do favour Nigeria.
- Nigeria earned a combined $5.5 billion in oil revenues in 2018 compared to $4 billion in 2017. Source: Budget Office 2018 Q4 Implementation report.