Governor of the Central Bank of Nigeria, Dr Godwin Emefiele, over the weekend stated that he does not see crude oil trading below $80 per barrel for the rest of 2018. But there are developments that suggest he might be wrong.
Dr Emefiele, who was speaking to journalists in London on Sunday, based his forecast on the impending US sanctions on Iran. According to him, “I do not expect the price to close less than $80 this year” provided the sanctions happen next month as expected.
But the Iran sanctions may not have the expected effect
There are strong indications that Emefiele’s forecast will end up being wrong because the expected effect of the impending sanction will not hold. According to Bloomberg, some countries might waive the US sanction on Iran by continuing to buy crude from the Gulf Nation.
Moreover, Saudi Arabia has assured international crude buyers that it will offset any possible effect of the November 4th sanction on Iran by tapping its “spare production capacity”.
Already, this assurance from Saudi Arabia and the possibility waivers on the Iranian sanction have caused the price of crude to decline as much as 2.5%. Global benchmark, Brent Crude, is currently trading at about $83. It could potentially decline further in coming days; or otherwise.
Understanding the situation…
A sanction on Iran, which is a major crude exporter, will reduce the availability of crude in the international market. This will, in turn, cause prices to spike. The likelihood of this sanction taking has already facilitated a steady rise in crude prices, which until recently was trading below $80.
The United States Government is bent on stifling economic activities in oil-rich Iran, which it accuses of ‘meddlings’ in the Middle East.
The Trump Administration also recently pulled out of the 2015 agreement reached with the hopes of limiting Tehran’s nuclear activities. Trump had described the nuclear as “the worst ever made”.
Now, his Government is trying to coerce other countries to abide by the planned sanction, with Secretary of State Mike Pompeo disclosing on Friday that America is “studying” possible waivers of the sanction.
Still on Emefiele’s forecast…
Even if the US sanction on Iran takes place on November 4th as expected, some countries and non-state actors may not abide by it. In order words, the OPEC member could continue to find a market for its crude. Moreover, Saudi Arabia has promised offset any likely effect crude shortage.
Altogether, the recent rally in crude prices may not persist. If anything, there might even be a price decline as we have already above, which could even fall below $80 against Dr Emefiele’s expectation.
Meanwhile, Nigeria needs the price of oil to remain high. This is because the country’s economy is largely dependent on foreign exchange earned through crude exportation.