Major petroleum product traders and independent traders could potentially experience relief from rising gasoline importation costs due to a combination of falling oil prices and the strengthening of the Nigerian naira.
Oil Price Decline and Economic Concerns: Oil prices experienced a decline of more than 3% during the week ending on August 18. This decline was driven by concerns about slowing economic growth in China, the world’s largest oil importer, and expectations of further interest rate hikes in the United States. Brent crude, the international benchmark, traded at $83.5 a barrel, representing a 3.1% decrease from the beginning of the week.
Despite the decline, investors are closely monitoring the tension between slowing global growth and tight global supply, which may result in oil prices remaining range-bound for the time being. Negative economic data from China, as well as concerns about incomplete interest rate hikes by the US Federal Reserve, contribute to the uncertainty in the oil market.
Naira Appreciation and Gasoline Costs: The Nigerian naira experienced an impressive rally of nearly 15% against the US dollar on the parallel market in a week. This appreciation, reaching around N/$810 in Lagos and Abuja, makes gasoline cheaper for importers, even if the international crude oil price remains unchanged.
Challenges and Economic Reforms: However, the rise in petrol prices during this quarter poses a challenge to Nigeria’s economic reform progress and could create additional political difficulties for the president. The increasing cost of living, with food inflation at around 27%, adds to the pressure.
Oil traders in the country have urged the federal government to address issues such as insecurity and suspend the 7.5% value-added tax (VAT) on diesel. They believe these measures are necessary to positively impact downstream sector activities. Additionally, the traders have called for measures to mitigate rising food and transportation costs, which could affect the welfare of citizens affected by recent deregulation.
Supply and Demand Dynamics: Oil supply remains tight due to production cuts implemented by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+. On the demand side, increased travel and improved industrial activity in the world’s largest economy (the US) have contributed to higher demand for oil.
Outlook: The convergence of falling oil prices and a stronger naira could provide some relief for petroleum traders and independent traders dealing with importation costs. However, the volatile global economic landscape, supply-demand dynamics, and internal economic challenges in Nigeria will continue to influence the petroleum market’s trajectory.