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CBN Offers New 12-Month Futures Contract of $1bn at N250/$

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One month into the June 27, 2016 introduction of and formal unveiling of the Naira-Settled OTC FX Futures Market, the pioneer 1M contract – NGUS JUL 27 2016 $/N279, for about $26.73 million executed between the Central Bank of Nigeria (CBN) and authorised Dealers on FMDQ OTC Securities Exchange, matured and was settled on Wednesday, July 27, 2016, according to this BusinessDay.

Consequently, in line with the FMDQ OTC FX Futures Market Framework,N962.23mn total Settlement Amount was paid to the ‘Futures Banks’ – the counterparties to the CBN – on the matured NGUS JUL 27 2016 at $/N279 on the maturity date, July 27, 2016.

The CBN has consequently replaced the matured July 2016 contract and has now offered a new 12M contract, NGUS Jul 19 2017, with a total notional amount on offer of $1.00bn at N250 to $1.

Analysts say this is a milestone in the history of the Nigerian FX market, with the OTC FX Futures market having reported remarkable success in its almost one month of existence with over $1.20bn worth of the CBN’s OTC FX Futures contracts across all the tenors.

The profile of the buyers of the contracts includes Foreign Portfolio Investors (FPIs) and importers, among others, who have been trading on the FMDQ OTC FX Futures Trading and Reporting System.

In line with the OTC FX Futures Market Framework released by FMDQ and the FMDQ OTC FX Futures Market Operational Standards, the 1M contract was valued by the Exchange against the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) spot rate, which ceased to trade on Wednesday, July 20, 2016.

Clearing operations and settlement for the final variation margins, as valued by FMDQ, were effected through the Nigeria Inter-Bank Settlement System PLC (NIBSS), acting as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts.

Meanwhile, the hike in the Monetary Policy Rate (MPR), anchor rate at which the CBN lends to banks by the Monetary Policy Committee (MPC) may have started its positive impact, with over 4,000 percentage or $158million surge in deals at the interbank FX spot market, a day after the decision, data from the FMDQ website show.

Consequently, foreign exchange dealers traded $162.4million in 33 spot deals between Tuesday and Wednesday, compared to thin trade of $3.560million recorded the preceding Monday in six deals.

Nigeria’s currency traded at an average of N316.93/USD on Thursday, as at 2.39 PM, FMDQ data showed. At the FX interbank spot market, the local currency reached a high of N340.46/USD and a low of N283/USD yesterday. Dealers traded $23.414million on Thursday in 12 deals.

Charlie Robertson, global chief economist at Moscow-based Renaissance Capital said “Nigeria FX is closer to the market clearing rate and long-term fair value (315-320/$) on a 20 year average Real Effective Exchange Rate (REER) model”.

“The key point is that Africa is back – with two of the three biggest economies (Nigeria and Egypt) now making themselves investable again, after an overly long period where FX policy deterred investors. As we progress through 2H16, it is worth re-examining Africa again,” Robertson said.

Michael Famoroti, economic research analyst at Vetiva Capital Management, in recent commentary said the move by the MPC is positive for the naira in the short-term “but note that longer-term, it is in addressing the structural defects in Nigeria’s export sectors that will ensure a viable currency market.

“We expect that following this decision, the interbank market rate could retrace closer to the N300/USD level and if the CBN’s move to redirect liquidity via banks to Bureau De Changes (BDCs) proves successful, the gap between the interbank and parallel market rate could narrow in the coming weeks,” the Vetiva analyst added.

The prices of oil, Nigeria’s biggest source of revenue steadied just above three-month lows on Thursday, as producers continued to pump more than needed, filling inventories, and economic growth prospects darkened.

Brent crude oil was down 35 cents at $43.12 a barrel by 1335 GMT, after touching $42.88, its lowest since April 20. U.S. light crude was down 15 cents at $41.77.

“Having introduced a flexible exchange rate policy, we expect the current move by the CBN to raise interest rates to positively affect the foreign exchange market as we anticipate that more foreign direct investments (FDI) will begin to flow into the country, targeting investments in Government securities which will now return higher. This should immediately improve liquidity in the FX market and reduce volatility,” said research analysts at Lagos-based Capital Bancorp Plc.

Naira-Settled OTC FX Futures contracts are essentially non-deliverable Forwards (NDF) contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity/settlement date.

Upon maturity, both parties are assumed to have transacted at the Spot FX market rate.

Since these contracts are cash- settled in Naira, there is no physical delivery of the underlying currency to the counterparties, in this case the CBN and the Authorised Dealers.

The differential between the OTC FX Futures contract rate and the NIFEX Spot rate on the settlement day determines the Settlement Amount, the gain/loss inherent in the contract; and the party that would have suffered a loss with the NIFEX Spot FX rate is paid the Settlement Amount in Naira, thus ensuring that both parties in purchasing or selling the US Dollar in the Spot FX market will achieve an effective rate equal to the NDF rate that had been guaranteed to each other via the trade in the OTC FX Futures contract.

To facilitate the operational efficiency of the Futures market, the CBN, on June 24, 2016, issued a circular on ‘Externalisation of Differentials on OTC FX Futures Contracts for FPIs’, thus providing an avenue for this category of end-users, upon presentation of an FMDQ-issued Settlement Advice and a Certificate of Capital Importation, to repatriate the Settlement Amounts of the OTC FX Futures contracts. Similarly, on July 22, 2016, the apex Bank released another circular mandating the sale of foreign currency proceeds of international money transfers by banks to the Bureaux-de-Change (BDC) operators, who will in turn sell the proceeds to retail end-users.

Thus serving to ease the demand pressure for FX in the BDC market and improving the value of the Nigerian Naira against the US Dollar.

Meabwhile in its continued efforts aimed at bringing back liquidity into the Nigerian FX market, attracting foreign investors and shoring up the contracting economy, the Central Bank revised its quotes on the OTC FX Futures market on July 27, 2016.

A month after the launch of the product, the OTC FX Futures market has witnessed significant buy-in from the market, with c. $1.33bn of contracts purchased in the first month, considerably reducing front-loading in the spot market and promoting hedging

Although the Spot FX rate depreciated 14.73 percent between June 27 (N281.49) and July 27, 2016 (N330.12) and yields on the 1-year and 3-month bills (Jul-6-2017 & Oct-20-2016) recorded 7.20 percent and 4.13 percent hikes over the same period, OTC FX Futures quotes by the CBN were adjusted to remain competitive in furtherance of the strategy to attract foreign investors into the domestic market.

Changes along the OTC FX Futures curve were asymmetric, with significant adjustment at the short-end of the curve.

NGUS APR 26 2017, previously quoted at N210.00 (the lowest priced contract), is now quoted at N260.00, reflecting a 23.81% increment in the price – the largest change across the curve.

Patrick Atuanya & IHEANYI NWACHUKWU

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Fed’s Decision to Hold Rates Stalls Oil Market, Brent Crude Slips to $82.17

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Oil prices faced a setback on Thursday as the U.S. Federal Reserve’s decision to maintain interest rates dampened investor sentiment.

The Federal Reserve’s announcement on Wednesday indicated a reluctance to initiate an interest rate cut, pushing expectations for policy easing possibly as late as December. This unexpected stance rattled markets already grappling with inflationary pressures and economic uncertainty.

Brent crude, the international benchmark for Nigerian crude oil, saw a drop of 43 cents, or 0.5% to $82.17 a barrel, reflecting cautious investor response to the Fed’s cautious approach.

Similarly, West Texas Intermediate (WTI) crude oil also slipped by 46 cents, or 0.6% to settle at $78.04 per barrel.

Tamas Varga, an analyst at PVM Oil, commented on the Fed’s decision, stating, “In the Fed’s view, this is the price that needs to be paid to achieve a soft landing and avoid recession beyond doubt.”

The central bank’s move to hold rates steady is seen as a measure to balance economic growth and inflation containment.

The Energy Information Administration’s latest data release further exacerbated market concerns, revealing a significant increase in U.S. crude stockpiles, primarily driven by higher imports.

Fuel inventories also exceeded expectations, compounding worries about oversupply in the oil market.

Adding to the downward pressure on oil prices, the International Energy Agency (IEA) issued a bearish report highlighting concerns over potential excess supply in the near future.

The combination of these factors weighed heavily on investor sentiment, contributing to the decline in oil prices observed throughout the trading session.

Meanwhile, geopolitical tensions in the Middle East continued to influence market dynamics, with reports of Iran-allied Houthi militants claiming responsibility for recent attacks on international shipping near Yemen’s Red Sea port of Hodeidah.

These incidents underscored ongoing concerns about potential disruptions to oil supply routes in the region.

As markets digest the Fed’s cautious stance and monitor developments in global economic indicators and geopolitical tensions, oil prices are expected to remain volatile in the near term.

Analysts suggest that future price movements will hinge significantly on economic data releases, policy decisions by major central banks, and developments in geopolitical hotspots affecting oil supply routes.

 

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Crude Oil

Nigerian Oil Loses Ground to Cheaper US and Russian Crude

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Crude oil

Nigeria’s once-thriving oil industry is facing a significant challenge as traditional buyers increasingly turn to more affordable alternatives from the United States and Russia.

This shift has led to France emerging as the leading buyer of Nigerian crude, marking a significant change in the global oil market dynamics.

Top Nigerian crude grades like Bonny Light, Forcados, and Brass have long been favored by refineries in Europe and Asia due to their low sulfur content.

However, the country’s primary customers, including India and China, are now opting for cheaper US and Russian oil.

This trend poses a substantial risk to Nigeria, which relies on oil exports for more than half of its foreign exchange earnings.

Data from BusinessDay reveals a stark decline in India’s purchase of Nigerian crude. In the first quarter of 2024, India bought N1.3 trillion worth of Nigerian oil, a significant drop from the average of N2 trillion purchased between 2018 and 2021.

“Buyers are increasingly turning to cheaper alternatives, raising concerns for the country’s revenue stream,” said Aisha Mohammed, a senior energy analyst at the Lagos-based Centre for Development Studies.

The latest tanker-tracking data monitored by Bloomberg indicates that India is buying more American crude oil as Russian energy flows dwindle amid sanctions.

India’s state-owned oil refiners and leading private companies have increased their imports of US crude, reaching nearly seven million barrels of April-loading US oil. This shift is the largest monthly inflow since last May.

Russian crude flows to India surged following the invasion of Ukraine, making Russia the biggest supplier to the South Asian nation.

However, tighter US sanctions have stranded Russian cargoes, narrowing discounts, and prompting India to ramp up purchases from Saudi Arabia.

“Given the issues faced with importing Sokol in Russia, it’s no surprise that Indian refineries are turning toward US WTI Midland as their light-sweet alternative,” explained Dylan Sim, an analyst at industry consultant FGE.

As a result, France has overtaken the Netherlands to become the biggest buyer of Nigerian crude oil, purchasing products worth N2.5 trillion in the first quarter of 2024.

Spain and India occupied second and fourth positions, with imports valued at N1.72 trillion and N1.3 trillion respectively, as of March 2024.

The sluggish pace of sales for Nigeria’s May supplies highlights the market’s shifting dynamics. Findings show that about 10 cargoes of Nigerian crude for May loading were still available for purchase, indicating a reduced demand.

Rival suppliers such as Azeri Light and West Texas Intermediate have also seen price weaknesses, impacting Nigerian crude demand.

“We’ve got much weaker margins, so Nigeria’s crude demand is taking a hit,” noted James Davis, director of short-term oil market research at FGE.

Sellers seeking premiums over the Dated Brent benchmark have found the European market less receptive, according to Energy Aspects Ltd.

“May cargoes were at a premium that didn’t work that well into Europe, but lower offers have seen volumes move,” said Christopher Haines, EA global crude analyst. “Stronger forward diesel pricing is also helping.”

Some Nigerian grades are being priced more competitively, including Qua Iboe to Asia and Bonny Light to the Mediterranean or East, with the overhang slowly reducing, according to Sparta Commodities.

However, the overall reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government.

“Reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government,” warned Charles Ogbeide, an energy analyst with a Lagos-based investment bank.

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Commodities

Refiners Predict Petrol Prices to Fall to N300/Litre with Adequate Local Crude Supply

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Petrol - Investors King

The pump price of Premium Motor Spirit (PMS), commonly known as petrol, could drop to N300 per litre once local production ramps up significantly, according to operators of modular refineries.

This projection hinges on the provision of sufficient crude oil to domestic refiners, which they say would undercut the exorbitant costs currently imposed by foreign refineries.

Speaking under the aegis of the Crude Oil Refinery Owners Association of Nigeria (CORAN), the refiners stressed the urgency for the government to ensure a steady supply of crude oil to local processing plants.

They argue that the reliance on imported petroleum products has been economically disadvantageous for Nigeria.

Eche Idoko, Publicity Secretary of CORAN, emphasized that the current high costs could be mitigated by boosting local production.

“If we begin to produce PMS in large volumes and ensure adequate crude oil supply, the pump price could be reduced to N300 per litre. This would prevent Nigerians from paying nearly N700 per litre and stop foreign refiners from profiting excessively at our expense,” Idoko stated.

The potential price drop follows the model seen with diesel, which experienced a significant price reduction once the Dangote Petroleum Refinery began its production.

“Diesel prices dropped from N1,700-N1,800 per litre to N1,200 per litre after Dangote started producing. This is a clear indication that local production can drastically reduce costs,” Idoko explained.

In a previous statement, Africa’s richest man, Aliko Dangote, affirmed that Nigeria would cease importing petrol by June 2024 due to the Dangote Refinery’s capacity to meet local demand.

Dangote also expressed confidence in the refinery’s ability to cater to West Africa’s diesel and aviation fuel needs.

Challenges and Governmental Role

However, achieving this price reduction is contingent on several factors, including the provision of crude oil at the naira equivalent of its dollar rate.

CORAN has advocated for this approach, citing that it would bolster the naira and reduce the financial burden on refiners who currently buy crude in dollars.

The Nigerian government has shown some commitment towards this goal. Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), confirmed that a framework has been developed to ensure consistent supply of crude oil to domestic refineries.

“We have created a template for the Domestic Crude Oil Supply Obligation to foster seamless supply to local refineries,” Komolafe stated.

Industry Reactions

Oil marketers have welcomed the potential for reduced petrol prices. Abubakar Maigandi, President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), expressed optimism about the Dangote Refinery’s impact on petrol prices.

“We expect the price of locally produced PMS to be below the current NNPC rate of N565.50 per litre. Ideally, we are looking at a price around N500 per litre,” Maigandi noted.

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