Why oil traders are watching the US elections, and what it could mean for Nigeria

Oil traders are preparing for the possibility that fighting in the Middle East could restart after the US midterm elections on 3 November. Commodity strategists at the bank ING said this in a note. They also said that if no new strikes on Iran follow the elections, oil prices are likely to fall.

That sounds distant from a market in Aba or a filling station in Lagos. It is not. Oil is the world's most important fuel and Nigeria's most important export. This article explains what is going on, in plain words.

What are oil traders actually expecting?

ING's strategists, Warren Patterson and Ewa Manthey, wrote that traders appear to be getting ready for a return of hostilities after the elections. It has been reported that President Trump has repeatedly hinted, or said outright, that he may restart attacks on Iran after the midterms. That report is unconfirmed here, because the source gives no primary statement from him.

The ING strategists were careful. They said escalation is not a done deal. Traders are positioning for a possibility, not a certainty.

What is a risk premium?

A risk premium is the extra amount buyers pay because something could go wrong. Think of a trader buying tomatoes before a possible road blockade. If she fears the trucks may not get through, she may pay more today to stock up. The extra money has nothing to do with the tomatoes. It is the price of the fear.

Oil works the same way. If traders fear that war could disrupt supply, they pay more now to secure barrels. That extra amount is the risk premium.

Why could prices fall even without a peace deal?

The ING strategists said an agreement between the US and Iran may not be needed for prices to pull back. In their view, simply getting past the elections without renewed strikes might be enough for the risk premium to start shrinking.

In the tomato example, the blockade never happens. Nobody has to sign a treaty. The fear drains away on its own, and prices ease. That is the logic ING describes.

What is happening in the Strait of Hormuz?

Hormuz is a narrow sea passage at the mouth of the Persian Gulf. A large share of the world's oil ships pass through it, so trouble there tends to move prices quickly.

The article says there were reports that oil flows out of Hormuz had returned to pre-war levels, and even gone above them. At first, those reports pushed prices down. The effect then wore off. The reason, the source says, is that other reports clashed with them. Those reports said Iranian strikes on tankers had reached an all-time high this month. These claims come from press reporting and are unconfirmed here.

The article's conclusion is that the situation in the Persian Gulf is not back to business as usual. Traders are hearing good news and bad news together, so they wait.

Why did diesel prices fall?

While crude oil waits, diesel has moved. The article says diesel prices are down after reports that Russian diesel is on its way to the United States. Analysts say the volumes agreed are too small to change the balance between supply and demand.

The source also gives one number. ING analysts said the ICE gasoil crack spread is down to $70 per barrel. That is the lowest since early October. It is also below the record highs reached last month, when supply around the world was disrupted.

A crack spread is the gap between the price of crude oil and the price of the fuel refined from it. Gasoil is the trading name for diesel-type fuel. The spread is roughly what the market pays for turning crude into diesel. A lower spread means diesel has become cheaper compared with the crude used to make it.

The source does not explain why a small shipment would move prices. RainingMoney's reading: traders react to headlines about supply as well as to the barrels themselves, and the news may have eased fear in a market that was already tense. The source does not confirm this.

How could this reach my pocket in Nigeria?

The source gives no Nigerian figures, so what follows is a general explanation, not a forecast.

Fuel prices: Nigeria imports some refined fuel and also produces some at home. When world oil prices rise, the cost of petrol and diesel tends to rise too, and that cost is passed on. Diesel matters to ordinary people more than many realise. It runs trucks that carry food, generators that power shops and workshops, and machines on farms. When diesel gets dearer, transport fares and food prices can follow. When it gets cheaper, the pressure can ease, though prices at the pump often fall more slowly than they rose.

Government earnings: Nigeria sells crude oil abroad, and the money helps fund public spending. Higher oil prices generally mean more income for the government. Lower prices mean less. The correspondent's Daily Brief note makes the same point: a renewed Middle East conflict could move oil prices, which affect fuel costs and Nigeria's oil earnings.

This creates an awkward pair of effects. A war-driven price rise could help government income while making fuel and transport costlier for households. A fall in prices would do the opposite. Neither outcome is purely good or bad for the average person.

What does the naira have to do with it?

Oil sales bring in dollars. When more dollars come into the country, it can support the naira. When oil income drops, that support can weaken. How strongly this happens depends on many other things, and the source says nothing about the naira, so it is not possible to say what would happen here.

What does this story tell us, and what doesn't it?

It tells us that traders are nervous and are pricing in some chance of renewed conflict. It tells us ING's strategists think prices could drop if the elections pass quietly. It also tells us that conflicting reports are keeping the market in a wait-and-see mood.

It does not tell us that war will resume. It does not tell us what price crude oil is trading at, or how far it might fall or rise. 

One more caution is the article's own. It says the significance of any price decline is questionable, because the market's reaction to earlier good news faded.

What should readers watch next?

• The elections on 3 November. ING's view is that the days after are the test of whether the risk premium shrinks.
• Tanker attacks. The article says Iranian strikes on tankers hit an all-time high this month. Further attacks would keep the market on edge.
• Hormuz shipping reports. Confirmed flows would matter more than conflicting claims.
• Diesel prices and the crack spread. The spread is at its lowest since early October. Whether that continues is not known.

None of this is a call to buy, sell or hold anything. It is a guide to what is moving a price that touches many Nigerian households, businesses and the public purse.