The Nigerian banking sector currently faces a delicate trade-off. While rising global oil prices, spurred by the US-Iran conflict, promise to bolster foreign exchange liquidity, they simultaneously intensify domestic macroeconomic risks.

For the domestic economy, this geopolitical conflict has both positive and negative implications due to heavy reliance on crude oil exports and exposure to energy-driven inflation,” notes the latest macroeconomic update from Meristem Securities Limited.

As the US-Israel-Iran conflict continues to dominate global market sentiment, Nigeria finds itself at a complex crossroads. The rapid escalation of tensions, characterised by military strikes and threats to the Strait of Hormuz, a critical chokepoint for global oil transit, has introduced significant volatility, with Brent crude briefly surging towards USD 84.80 per barrel following reports of maritime restrictions.

The domestic economy faces immediate headwinds from this instability. Following the deregulation of the downstream oil and gas sector, local pump prices have become increasingly sensitive to international crude fluctuations. The report highlights the transmission mechanism: “The rise in fuel prices is likely to transmit broader price pressure across the economy, as petrol is a key product used in transportation, electricity generation, and food distribution. This could trigger a renewed uptick in month-on-month inflation.”

This is already manifesting in the market. As downstream operators adjust to the volatile landscape, the Dangote refinery recently raised its Premium Motor Spirit gantry price by N101, pushing the ex-depot rate from N774 to N875 per litre. Businesses are expected to face higher operating and logistics costs, which threaten to reverse recent disinflationary gains.

Conversely, the crisis provides a potential boost to Nigeria’s external position. With crude oil still dominating export receipts, the price rally could bolster the current account surplus. Meristem analysts point to potential shifts in global energy flows: “With the closure of the Strait and the disruption of supply, part of the demand from Asia-Pacific countries such as China, Japan, and India may redirect toward West African oil, potentially supporting Nigeria’s export volumes if domestic output improves.”

This price effect is also seen as a buffer for the government’s fiscal performance. With the 2026–2028 Medium-Term Expenditure Framework benchmarking oil at USD 64.85 per barrel, current trading levels provide a welcome revenue cushion that could help moderate fiscal deficits and reduce the necessity for aggressive borrowing.

Banking sector: The indirect beneficiary

For the banking sector, the relationship with the ongoing conflict is multifaceted. While banks face risks from broader economic instability, the surge in oil prices offers a pathway to improved earnings. “Higher crude prices typically translate into stronger FX inflows, either through increased oil receipts or higher remittances, and banks act as intermediaries for a significant share of these FX transactions,” the report explains.

Consequently, the resulting boost in FX liquidity and transaction volumes is expected to provide a tailwind for banking sector performance, offsetting some of the macroeconomic risks posed by inflation.

Eurobond volatility

The conflict has also rippled through Nigeria’s sovereign Eurobond market, which experienced a ‘risk-off’ sentiment early in the week. Yields climbed, reflecting investor anxiety, before recording a modest rebound by mid-week as reports of potential insurance support for shipping vessels began to soothe markets.

Looking ahead, Meristem warns that the situation remains precarious. It stated, “Persistent geopolitical uncertainty could lead to intermittent volatility in bond valuations, while the inflationary impact of higher energy prices may complicate the Federal Reserve’s monetary policy. This could potentially delay interest rate cuts and keep developed-market yields attractive, a factor that might further strain investor appetite for emerging-market assets like Nigeria’s Eurobonds.”