Renewed geopolitical tensions in the Middle East are beginning to transmit fresh pressures into Nigeria’s foreign exchange market, raising concerns among analysts and banking sector players about rising arbitrage opportunities, renewed dollar scarcity, and potential volatility in the naira.

The ripple effects follow a sharp rally in global crude oil prices triggered by escalating hostilities in the Middle East, which disrupted tanker movements through the strategic Strait of Hormuz, a critical global energy corridor that accounts for roughly 20–30 per cent of the world’s daily oil supply.

The escalation has forced the shutdown of several refineries and liquefied natural gas plants across parts of the region, intensifying concerns about near-term supply constraints in the global energy market. Brent crude consequently surged by nearly 25 per cent week-on-week to $91.10 per barrel.

While higher oil prices would ordinarily provide fiscal relief and improve Nigeria’s external balances, analysts say structural challenges in crude production could once again prevent the country from fully capturing the benefits of the rally.

Early domestic spillovers emerge

Barely a week into the crisis, early spillover effects are already evident domestically. Notably, the retail price of Premium Motor Spirit (PMS) has increased by at least N100 per litre, reaching a floor of roughly N930.00/litre in Lagos and several other states. At the same time, queues have begun to reappear across some filling stations amid supply shortages, disrupting logistics, raising transportation costs, and adding pressure to business operating expenses.

Although Dangote Refinery has the installed capacity to fully meet domestic PMS demand (estimated full capacity output:75.0 million litres daily versus estimated peak domestic consumption: about 56–58.0 million litres), limited access to domestically produced crude continues to constrain its operations.

Thus, this leaves the refinery exposed to global supply shocks. Recent reports indicate that the refinery currently receives only 5 of the 13 crude cargoes required monthly from NNPC Limited. This situation remains paradoxical given Nigeria’s proven crude oil reserves of approximately 37.3 billion barrels, the 11th largest globally, which, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), could sustain production for at least the next six decades.

Strain on FX market

The developments have not affected the country’s external reserves as it increased by $236.21 million w/w to $49.93 billion (March 5), marking the eleventh consecutive week of increase.

However, renewed demand for dollars, amid global uncertainties, exerted pressure on the currency market during the week. At the official NFEM window, the currency depreciated by 2.1 per cent to N1,393.26/$1, while weakening by 3.2 per cent w/w to close at N1,410/$1 at the parallel market, triggering concerns that traders could take advantage of the situation, withholding FX or selling at a higher rate.

When gaps between official and informal exchange rates widen, it typically encourages speculative demand for FX.

Sources within the financial sector say the Central Bank of Nigeria (CBN), under Governor Olayemi Cardoso, is closely monitoring developments and sustaining interventions to stabilise the FX market.

The apex bank in its bid to moderate volatility in the currency market, intervened during the week with an estimated $300 million injection into the FX market.

However, research houses say the improvement in reserves has not been sufficient to offset rising demand for dollars in the domestic market. According to them, renewed global uncertainty has driven investors toward safe-haven assets such as the U.S. dollar, while businesses and importers continue to seek foreign currency to meet trade obligations.

Trade finance constraints

Banks providing letters of credit, trade guarantees, and other import financing instruments may experience longer settlement cycles if FX supply tightens. Import-dependent sectors such as manufacturing, pharmaceuticals, and energy could face delays in accessing foreign currency, potentially affecting production schedules and supply chains.

Research and investment experts who spoke to Daily Sun, said that Nigeria risks missing out on the windfall gains from the ongoing oil price rally due to persistent structural constraints in crude production.

According to them, had Nigeria been producing at its budget benchmark of 1.84mbpd, the country could have realised an estimated daily windfall of roughly $30.00 million (about N42.50 billion at an exchange rate of N1,360/$1). Such additional inflows would have provided critical fiscal buffers at a time when global shocks are beginning to feed into domestic price pressures.

Managing Director, Afrinvest Consulting Limited, Abiodun Keripe, explained that while elevated oil prices could support Nigeria’s fiscal and external balances, persistent production shortfalls and crude supply constraints continue to cap the upside.

He said, “Unless structural bottlenecks in the upstream sector are addressed, Nigeria risks once again missing the opportunity to convert favourable global oil price movement into meaningful fiscal and macroeconomic gains.

Looking ahead, Brent crude is expected to remain elevated, supported by geopolitical tensions in the Middle East and disruptions to oil supply from the Strait of Hormuz. On the domestic front, the Naira is likely to trade under mild pressure; however, CBN interventions and higher oil receipts from elevated oil prices should help cushion the currency, even as dollar demand in the currency market persists”.

In an emailed note, analysts at Cowry Research, concurred that in the near term, the naira is likely to remain under pressure amid persistent demand for foreign exchange and lingering liquidity constraints in the FX market.

“However, the modest improvement in external reserves and continued foreign exchange inflows could provide some support to the currency. In the oil market, crude prices may remain volatile as geopolitical developments and potential policy interventions by the United States continue to influence supply expectations. Nonetheless, sustained strength in global oil prices could improve Nigeria’s external position and support foreign exchange inflows over the medium term”, they said.

For their part, analysts at Cordros Research expect any depreciation of the naira to remain relatively contained, with the currency likely to retain its strength on a year-to-date basis, supported by Nigeria’s robust foreign exchange reserves and improved FX liquidity, which will provide the apex bank with sufficient buffers to intervene and curb excessive volatility in the FX market.

Conclusion

As geopolitical tensions in the Middle East continue to unsettle global energy markets, Nigeria finds itself once again navigating the complex intersection of oil price volatility and foreign exchange stability.

The immediate challenge lies in managing rising demand for foreign currency, narrowing FX liquidity, and the potential resurgence of arbitrage pressures in the currency market. Although the apex bank’s interventions and relatively strong external reserves may help cushion short-term volatility, sustained stability will depend largely on improving crude oil output, strengthening FX inflows, and maintaining confidence in the formal currency market.

Until these structural issues are addressed, external shocks, from geopolitical conflicts to global financial shifts, will continue to test the resilience of Nigeria’s FX framework and the banking system that supports it. (The Sun)