Brent oil price is still on the rise, closing yesterday at US$111.14/bbl as the Russian Ukraine crisis continues. The rise in global crude oil prices has been pushing up the cost of Automotive Gas Oil (diesel); JetA1, otherwise called aviation fuel; as well as Premium Motor Spirit, also known as petrol.
Based on news reports, diesel sold for between N550 and 625/litre where available. Unlike PMS, diesel has been deregulated, and the price adjusts with changes in the cost of crude oil, foreign exchange rate and a few other factors.
Beyond diesel price, airline operators also noted that the cost of aviation fuel had also been on the increase, leading to flight cancellations and delays, leaving many passengers stranded at airports. Aviation fuel, which sold for N190/litre and later N360/litre in January this year, rose to between N579 and N607/litre on Tuesday.
We also expect the crisis to push up commodity prices like wheat and barley. Russia and Ukraine are large exporters of wheat. Russia is the largest exporter of wheat and both countries accounted for about 30% of the global supply of the commodity in 2021.
A drop in wheat supply could cause a substantial increase in wheat prices. Nigeria relies mainly on imported wheat, importing 640,000 tonnes in 2021 based on data from USDA. In the first quarter of 2021 alone, Russia’s wheat exports to Nigeria were valued at N37.2bn based on news reports.
Data from the United States Department of Agriculture shows that between 2010 and 2020, as the consumption level of wheat rose, production volumes failed to meet up, resulting in a significant rise in wheat imports. On average, the country produced just 2.1% of the total wheat consumed during that period.
This significant rise in fuel costs, in addition to the lingering fuel scarcity, will cause a significant rise in utility costs. Given that the utility sub-basket constitutes 32.6% of the core inflation, core inflation may likely continue to rise in the short term.
In addition, a rise in the global price of wheat will feed into an increase in the prices of bread, pasta, noodles, and all wheat-based products, further causing an increase in food prices and food inflation. We also expect prices of barley, fertilisers and other commodities to rise.
In our 2022 outlook earlier in the year, we noted our expectation of moderation in food inflation by 4.0ppts to 15.01%, supported by favourable weather and base effect. However, the prognosis may be set to change, as we expect an increase in commodity prices and high fuel costs to have a negative pass-through effect on food prices from higher transport costs.
We also projected the core inflation rate to increase by 100bps to 14.11% due to the spillover effect from moderate currency depreciation. As things stand, the core inflation rate stands to increase significantly in the short term if the crisis persists.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
