Written on 09/06/2022 by Lukman Otunuga, Senior Research Analyst at FXTM
Brent crude has gained roughly 57% since the start of 2022.
The global commodity remains supported by ongoing geopolitical risks and rising demand. As oil producers enjoy the rich bounties from surging commodity prices, some countries have failed to make the most of such an opportunity. Nigeria’s sub-optimal oil production, poor infrastructure, and fuel subsidies have sapped the benefits from surging oil prices. For other countries, the rally in oil prices means more foreign exchange reserves, higher revenues, and potential economic growth. In Nigeria’s case, this blessing could turn into a curse.
It is widely known that oil sales make a massive chunk of Nigeria’s export earnings and government revenues. Despite being Africa’s largest crude producer, the country exports the global commodity but imports all by-products amid the weak infrastructure. So as oil prices rally, this could support earnings but also take a chunk out of foreign exchange earnings. It does not end here. Anything that is left is devoured by petrol subsidies which are expected to cost the government almost $10 billion this year.
As FX reserves are drained this continues to worsen Nigeria’s problem of dollar shortages which has dragged the Naira lower. In January of 2022, the government postponed the planned petrol subsidy removal till further notice, citing “high inflation and economic hardship”. Even if the government was to remove the subsidies in the future, the burning question is whether Nigeria has the ability to weather the storm such a move could create.
Focusing back on oil, the global commodity remains supported by supply concerns and prospects of higher demand after China relaxed lockdowns. Although various fundamental forces are pulling and tugging at oil, the path of least resistance remains north. Oil benchmarks are trading near multi-year highs and have the potential to push higher in the near term. This could mean more for pain for Nigeria despite other oil producers cashing in and enjoying the commodities boom.
For more information, please visit: FXTM
Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
0 Comments