Escalating tensions in the Middle East are creating a complex and potentially detrimental scenario for Nigeria's economy, presenting a "double-edged impact" on both its oil revenues and foreign exchange (FX) market. While the conflict is driving up global crude oil prices, it is simultaneously increasing global financial volatility, which could erode any FX gains derived from higher oil receipts. This analysis is based on a policy brief by the Centre for the Promotion of Private Enterprise (CPPE) and reports on market movements.

The ongoing conflict involving Iran, the United States, and Israel has intensified concerns about potential disruptions in the Strait of Hormuz, a critical chokepoint through which approximately 20 percent of the world's daily crude oil supply transits. Any instability in this vital shipping lane invariably affects oil prices, shipping costs, and global supply chains.

For Nigeria, an economy heavily reliant on crude oil, which accounts for over 85 percent of its export earnings and about half of government revenue, the implications are significant. Geopolitical shocks in the Middle East have historically led to sharp increases in crude prices, sometimes by $5–$15 per barrel within days. This recent escalation follows a joint military operation by the United States and Israel targeting perceived security threats from Iran, a move that came amid ongoing diplomatic efforts.

According to the CPPE, while higher oil receipts typically bolster FX liquidity and ease pressure on the naira, heightened global risk aversion often prompts investors to seek safe-haven assets. This can trigger portfolio outflows from emerging markets, a situation to which Nigeria, due to its reliance on foreign portfolio inflows, is particularly vulnerable. The net effect on the exchange rate will ultimately depend on whether the increased oil inflows can offset potential capital reversals.

The conflict has already sent oil prices soaring. Benchmark Brent crude climbed 9 percent to $79.41 per barrel on Monday, reaching a seven-month high, up from $72.87 on Friday. West Texas Intermediate (WTI) crude also saw a significant jump, rising 8.6 percent to $72.79 per barrel from approximately $67 on Friday. These sharp gains reflect traders' bets on potential slowdowns or halts in oil supplies from Iran and other key Middle Eastern producers if the conflict deepens.

The strategically vital Strait of Hormuz, through which roughly one-fifth of the world's seaborne oil trade passes, is under intense scrutiny. Although not formally closed, marine tracking data indicates a buildup of tankers on either side, as operators express wariness of potential attacks and face difficulties securing insurance for voyages through the corridor. Reports suggest two vessels were attacked on Sunday while transiting the channel. Jorge Leon, head of geopolitical analysis at Rystad Energy, noted that the "effective halt of traffic through the Strait of Hormuz, preventing 15 million barrels per day of crude oil from reaching markets" is the most immediate development affecting oil markets, warning of a "significant upward repricing of oil" unless de-escalation signals emerge swiftly.

The rise in global energy prices typically translates to higher costs for consumers, impacting everything from petrol prices to groceries and essential services. This surge comes at a challenging time for many Nigerian households already grappling with elevated inflation. The current tensions echo events in mid-February when Iran temporarily shut parts of the Strait of Hormuz, leading to a roughly 6 percent jump in oil prices in the days that followed.

In response to the volatility, eight members of the OPEC+ alliance announced plans to raise output. At a meeting held before the outbreak of hostilities, the Organisation of the Petroleum Exporting Countries stated it would increase production by 206,000 barrels per day in April, a larger boost than anticipated by analysts. The countries set to increase output include Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman. This move is seen as an attempt to cushion markets against supply shocks. However, analysts caution that sustained disruptions in the Strait of Hormuz could outweigh the impact of these additional barrels, potentially keeping oil prices elevated in the near term.

On the domestic front, Nigeria's capital market is expected to experience mixed impacts. Oil and gas equities may see benefits from the higher crude prices, while sectors such as consumer goods and manufacturing could face margin compression due to increased input costs and potential FX challenges. The CPPE has urged fiscal prudence, cautioning against repeating the historical cycle of spending booms followed by fiscal stress. Key recommendations include saving a portion of any oil windfall, accelerating domestic refining capacity, and implementing targeted social protection programs.