As highlighted by Paul Bloxham, Chief Economist - Global Commodities at HSBC, commodities play an important role in the development of the African continent, since more than 80% of the exports of 35 African countries (out of a total of 48) are linked to commodities such as gold, coal, platinum, and oil.
Oil is especially important for the continent (7.5% of the world's oil reserves come from Africa), as it can be seen by the fact that half of the OPEC’s 14 members are African. Therefore, any significant movement in oil prices can have a huge impact on African economic growth, especially countries like Angola, Chad, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and Sudan, which are heavily reliant on oil’s revenues.
The main issue is that most of these countries do not have diversified sources of income, as "many African economies are highly exposed to just one or two resources" explains Paul Bloxham in an HSBC market insight. He added that "for 30 of the 48 nations, a single commodity accounts for over 40 per cent of their exports".
With the fall of oil prices during the last decade, many African countries decided to adopt aggressive measures to reduce oil production costs. According to Eklavya Gupte from S&P Global Platts, an independent energy news and price provider, the cost of oil production in Nigeria, for instance, ranged from $15 to $30 a barrel in 2020, while it was around $50 a barrel in 2015.
Most countries also decided to try to reform their economies to become less dependent on oil revenues, following the 2014 drop in oil prices below $100 a barrel, but it isn’t an easy task - it takes time.
And with the recent fall of oil demand linked to the Covid-19 worldwide situation, it’s harder for these countries to implement the changes they want to. This is especially true as many projects are postponed to 2021 and 2022, and because many refiners in Africa are announcing permanent closures or refineries, even though WTI oil prices went back up almost to their pre-Covid levels, as most traders using trading apps for commodities could observe.
Price volatility isn’t the only thing African countries need to face when it comes to the energy industry, as "Africa's oil and gas industry also faces talent shortages, regulatory uncertainty, political instability, corruption and fraud, and infrastructure problems" declares PwC in its latest Africa oil and gas review.
Barclays increased last month its oil price prediction to $52 per barrel for the WTI and $55 a barrel for the Brent, but OPEC+ still reduced its oil production in January. For the British bank, transport demand could support oil price consumption, and it sees the situation coming back to normal around the end of 2021, with vaccination campaigns around the world. For Goldman Sachs, prices could go up to $65 per barrel by summer 2021, thanks to Saudi Arabia and other OPEC countries oil output, as well as the shift in power in the United States.