Why did Isaac Bashevis Singer win the Nobel Prize for Literature?
I love IBS's books and have read many of them, but I fail to understand how such niche writing garnered a Nobel Prize in Literature. 

The audience of his brilliant books are Jews, old Jews, Judeop...
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Because the Nobel committee felt his writing expressed "universal human conditions".

According to the official Nobel Prize website:

The Nobel Prize in Literature 1978 was awarded to Isaac Bashevis Singer "for his impassioned narrative art which, with roots in a Polish-Jewish cultural tradition, brings universal human conditions to life".

Although Singer's stories themselves were written in Yiddish and therefore only accessible (pre-translation) to a rather small audience, it seems the Nobel committee felt that they expressed something far bigger than the Yiddish-speaking or Jewish communities, something which any human could identify with regardless of their cultural background.

I know this isn't much info to go on, but it's all we're going to get for a long time. According to the Statutes of the Nobel Foundation:

A prize-awarding body may, however, after due consideration in each individual case, permit access to material which formed the basis for the evaluation and decision concerning a prize, for purposes of research in intellectual history. Such permission may not, however, be granted until at least 50 years have elapsed after the date on which the decision in question was made.

So they won't be releasing any more information about the reasoning for their decision until around 2028 - still another ten years to go! Anything else we can say now would be informed speculation.

I think there were several factors here, though of course we don't know all of them.

Not really niche

Firstly, I'd like to address the point of audience. While you say

The audience of his brilliant books are Jews, old Jews, Judeophiles and maybe 1% just randoms

In fact, he also wrote English translations of a lot of his works which were of course originally published in Yiddish, meaning the general public could access them. According to Wikipedia

English translations of dozens of his stories were frequently published in popular magazines such as Playboy and Esquire

meaning that they did have a wider audience than just those who could read Yiddish or who sought out his works. Singer was also well known because he was one of the leaders of the Yiddish literary movement.

Doesn't have to be popular

As Time Magazine puts it:

the Swedish Academy has always seemed to swing between wildly popular writers (William Golding, Gabriel García Márquez and Toni Morrison) and those who are more niche (Eyvind Johnson and Harry Martinson)

Even if Singer's work wasn't very well known, the popularity of the author's work isn't a requirement for being picked.

What the committee says

Finally, I might point out that the Nobel committee itself issues a statement explaining its reasoning:

for his impassioned narrative art which, with roots in a Polish-Jewish cultural tradition, brings universal human conditions to life.

Finally, from Singer's own acceptance speech:

The high honor bestowed upon me by the Swedish Academy is also a recognition of the Yiddish language

and indeed, the prize helped propel the Yiddish literary movement.