Oil prices have reached their highest level since 2014, as Saudi Arabia announced that it will maintain its voluntary production cuts of one million barrels per day until the end of 2023.
Russia also announced it would extend its export cuts of 300,000 bpd for the same period.
The decision came as a surprise to the market, which expected the kingdom to ease its supply curbs as demand recovers from the pandemic.
The move has boosted the price of Brent crude, the international benchmark, to above $90 a barrel on Tuesday, up more than 12 % since the start of the year.
West Texas Intermediate, the US marker, also rose to $87 a barrel, its highest level in seven years.
The surge in oil prices has implications for the global economy, as higher energy costs could fuel inflation and dampen consumer spending. It also poses a challenge for Nigeria, Africa’s largest oil producer and exporter, which relies on oil revenues for about half of its budget and 90% of its foreign exchange earnings.
Nigeria has been struggling with the impact of fuel subsidy removal, as it led to higher fuel prices surging by over 400%. Higher crude oil prices could likely lead to higher fuel prices piling more pressure on the government to provide succor for millions of Nigerians who have seen their purchasing power dissipate.
On the positive side, higher oil prices could boost Nigeria’s oil revenues and improve its fiscal position.
This could enable the government to increase its spending on infrastructure, health and education, which are crucial for economic growth and development.
It could also help the government to reduce its borrowing and debt servicing costs.
The Backstory
Since July 2023, Saudi Arabia decided to cut 1 million barrels per day from its oil production leading to an increase in crude oil prices. Last month, Bloomberg reported on the possibility that Saudi Arabia would extend its cuts.
On August 3, Raad Alkadiri, managing director at Eurasia Group, told Bloomberg that following a price recovery and a shift in market sentiment, Riyadh will not want to rock the ship by restoring 1 million barrels a day of supply that markets are now expecting to remain shut in. It is important to note that when production is cut and supplies dwindle, crude prices rise.
The Nigerian context
The increase in Brent crude oil prices primarily affects Nigeria when oil marketers decide to import petroleum products at higher prices. This, in turn, may result in potential fuel price hikes. Nigeria currently does not operate an operational oil refinery of its own.
Therefore, as marketers import refined petroleum products, it is anticipated that the fluctuations in the global market will have an impact on pump prices, particularly during periods of high demand. Additionally, local prices of these products will be subject to variations influenced by local logistics and transportation costs.
What you should know
Nigeria’s Minister of State for Petroleum Resources, Heineken Lokpobiri has said that Nigerians should expect all local refineries – Warri, Kaduna, and Port Harcourt to become active by the end of 2024.
