It felt almost like an impossibility that in less than a year crude oil price could be trading above $60 after the oil price crash between March and April 2020 that saw the commodity trade at multi-decade lows of around $14 per barrel.
However, barely 10 months and a record oil supply reduction later, crude oil prices closed the week above $60 per barrel for the first time in over a year.
The oil price rally is still brewing strong this year as year-to-date Bonny Light crude oil price growth reached 20 percent on Friday last week.
While many expected the oil price recovery to help strengthen the Naira by boosting Nigeria’s foreign external reserves, the joke is on all of them as Nigeria’s external reserves has grown only by 1 percent year-to-date as at market close on Friday.
The foreign external reserves stood at $35.52 billion on February 17 2020 from its year beginning size of $35.37 billion, a growth of only $150 million.
The foreign exchange reserves are assets held on reserve by the Central Bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. For a mono-product export economy like Nigeria, its largest contributor to its foreign reserves are its earnings from crude oil sales exports.
Typically, as the value of oil exports rise, so also does the foreign external reserves assuming that the Central Bank isn’t depleting the reserves faster than its exports are building it.
Nigeria continues to struggle with exchange rate volatility and dollar scarcity despite the 10-month-old rally in crude oil price. Analysts say the Central Bank has spent the better part of the last few months trying to defend the Naira at the expense of the foreign external reserves.
In the last one month alone, that is between January 11 and February 11, the external reserves declined by about $337 million as the government continues to draw far more from the reserves than it is adding into the reserves over the past month.
With crude oil price trading above $60, it gives the Federal Government the opportunity to quickly rebuild its depleted Excess Crude Account (ECA) which is critical to serve as a financial buffer for the government if oil prices tank again.
The Excess Crude Account (ECA) is a fund established in 2004 by the national government of Nigeria intended to stabilize the country’s economy and smooth out the impact of price volatility in oil exports. The ECA is funded by the difference between the market price of crude oil and the budgeted price of crude oil as contained in the government’s appropriation bill.
The crude oil price benchmark for 2021 was set at $40 per barrel, however, with oil trading above $60 per barrel, it gives the government a 50 percent excess crude oil revenue that could be saved for the future.
As at H1 2020, the ECA had declined to $72 million from $1.8 billion in April 2018 as funds from the ECA had been used to cover some of the government revenue shortfalls over the last few years.