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Biggest African Economies Stall on Politics, Commodity Slump

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Nigeria inflation hits six-year high

Africa’s two largest economies are stalling amid slumping commodity prices and political infighting that’s hampering decision making.

A government report on Wednesday will probably show Nigeria contracted for a second consecutive quarter in the three months through June as the price and output of oil, its main source of revenue, were squeezed. While South Africa may have avoided falling into a recession, according to the median estimate of five economists surveyed by Bloomberg, the continent’s most-industrialized economy will not grow this year, the nation’s central bank said last month.

The global slump in commodity prices and weak demand from the continent’s main export partners have hit Nigeria, Africa’s second-largest oil producer, and South Africa, where mining produce accounts for about half of export earnings, weighing on both economies. A shortage of foreign currency in Nigeria after the central bank held a currency peg for more than a year, curbed imports, further limiting output, while political uncertainty in South Africa increased in the last week.

“Both countries’ economies are on a declining path,” Manji Cheto, senior vice president at Teneo Intelligence in London, said by phone. “That’s being led by politics in South Africa, and government policies that are reactive in Nigeria and might not work in the short term.”

Nigeria’s economy probably shrank 1.6 percent in the three months through June, according to the median of 15 economist estimates compiled by Bloomberg, following a 0.4 percent year-on-year contraction in the first quarter. Gross domestic product may decline by 1.8 percent for the year, according to the International Monetary Fund.

Nigeria delayed the approval of its record spending plans of 6.1 trillion naira ($19.4 billion) as President Muhammadu Buhari’s administration haggled with lawmakers over budgetary allocations. Militants have destroyed energy installations in the Niger River delta, cutting the nation’s oil output to an almost three-decade low, and further reducing earnings from an industry hit by a more than 50 percent drop in price since the middle of 2014.Nigeria relies on oil for two-thirds of government revenue and 90 percent of foreign-currency earnings.

Commodity Prices

“Both countries are adjusting to the decline in commodity prices,” said Sizwe Nxedlana, chief economist at Johannesburg-based First National Bank. “The nice thing about South Africa is that we are significantly more diversified as an economy than Nigeria.”

Nigerian central bank Governor Godwin Emefiele increased borrowing costs by 200 basis points last month to fight inflation that reached 16.5 percent in June and lure investors to help prop up the naira. The currency has lost more than a third of its value against the dollar since the central bank removed a currency peg on June 20.

Diversified Economy

While South Africa’s rand strengthened more than 10 percent against the dollar between the start of the year and early August, helping the economy to temporarily replace Nigeria as the continent’s largest in dollar terms, the currency slumped more than 5 percent since reports a week ago that Finance Minister Pravin Gordhan may be arrested. Gordhan, 67, said on Aug. 24 his attorneys received a letter from the Hawks, a special police unit, asking him to come to their office. He did not comply with the request.

“It’s a foregone conclusion that Nigeria is in recession,” Cheto said. “Revenue growth has been positive in South Africa, but if the political situation deteriorates, it will show negatively in the economy.”

The naira was unchanged at 314.75 per dollar by 9:01a.m. on Lagos on Tuesday. The rand strengthened 0.3 percent to 14.3682 per dollar.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Prices Decline on Rising India COVID-19 Cases, U.S Inflation Concerns

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Global oil prices extended a decline on Friday following a 3 percent drop on Thursday as coronavirus cases rose in India, one of the world’s largest oil consumers.

Brent crude oil, against which Nigerian oil is priced, declined by 35 cents or 0.5 percent to $66.70 a barrel at 5 am Nigerian time on Tuesday while the U.S West Texas Intermediate (WTI) fell by 28 cents or 0.4 percent to $63.54 per barrel.

The commodity super cycle rally just hit a hard stop and the energy market doesn’t know what to make of Wall Street’s fixation over inflation and the slow flattening of the curve in India,” said Edward Moya, senior market analyst at OANDA.

The crude demand story is still upbeat for the second half of the year and that should prevent any significant dips in oil prices,” he added.

Prices dropped over a series of key economic data that stoke inflation concerns and forced experts to start thinking the Federal Reserve could raise interest rates to curb the surge in inflation.

An increase in interest rates typically boosts the U.S. dollar, which in turn pressures oil prices because it makes crude oil more expensive for holders of other currencies.

This coupled with the fact that India, the world’s third-largest oil consumer, recorded more than 4,000 COVID-19 deaths for a second straight day on Thursday, dragged on the oil outlook in the near term.

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Brent Crude Rises to $69 on IEA Report

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Crude Oil - Investors King

Oil prices rose after the release of the International Energy Agency’s (IEA)  closely-watched Oil Market Report, with WTI Crude trading at above $66 a barrel and Brent Crude surpassing the $69 per barrel mark.

Prices jumped even though the agency revised down its full-year 2021 oil demand growth forecast by 270,000 barrels per day (bpd) from last month’s assessment, expecting now demand to rise by 5.4 million bpd. The downward revision was due to weaker consumption in Europe and North America in the first quarter and expectations of 630,000 bpd lower demand in the second quarter due to India’s COVID crisis.

The excess oil inventories of the past year have been all but depleted, and a strong demand rebound in the second half this year could lead to even steeper stock draws, the IEA said yesterday, keeping an upbeat forecast of global oil demand despite the weaker-than-expected first half of 2021.

However, the upbeat outlook for the second half of the year remains unchanged, as vaccination campaigns expand and the pandemic largely comes under control, the IEA said.

Moreover, the global oil glut that was hanging over the market for more than a year is now gone, the agency said.

“After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s COVID-19 demand shock have returned to more normal levels,” the IEA said in its report.

In March, industry stocks in the developed economies fell by 25 million barrels to 2.951 billion barrels, reducing the overhang versus the five-year average to only 1.7 million barrels, and stocks continued to fall in April.

“Draws had been almost inevitable as easing mobility restrictions in the United States and Europe, robust industrial activity and coronavirus vaccinations set the stage for a steady rebound in fuel demand while OPEC+ pumped far below the call on its crude,” the IEA said.

The market looks oversupplied in May, but stock draws are set to resume as early as June and accelerate later this year. Under the current OPEC+ policy, oil supply will not catch up fast enough, with a jump in demand expected in the second half, according to the IEA. As vaccination rates rise and mobility restrictions ease, global oil demand is set to soar from 93.1 million bpd in the first quarter of 2021 to 99.6 million bpd by the end of the year.

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OPEC Expects Increase In Global Oil Demand Raises Members’ Forecast on Crude Supply

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The Organisation of Petroleum Exporting Countries (OPEC) yesterday lifted its forecast on its members’ crude this year by over 200,000 bpd and now expects demand for its own crude to average 27.65mn bpd in 2021.

This is almost 5.2mn bpd higher than last year and around 2.7mn b/d higher than an earlier estimate of the group’s April production.

According to the highlights of the organisation’s latest Monthly Oil Market Report (MOMR), OPEC crude is projected to rise from 26.48 million bpd in the second quarter to 28.7 million bpd in the third and 29.54 million bpd in the fourth quarter of the year.

The report also indicated a fall in Nigeria’s crude production from 1.477 bpd in February to 1.473, a difference of just about 4,000 bpd before rising again in April to 1.548 million bpd, to add 75,000 bpd last month.

OPEC stated that its upward revision of members’ crude was underpinned by a downgrade in the group’s forecast for non-OPEC supply, which it now expects to grow by 700,000 bpd to 63.6mn b/d against last month’s report’s projection of a 930,000 bpd rise to 63.83mn bpd.

The oil cartel projected that US crude output would drop by 280,000 bpd this year, compared with its previous forecast for a 70,000 bpd decline.

On the demand side, OPEC kept its overall forecast unchanged from last month’s MOMR, stressing that it expects global oil demand to grow by 5.95 million bpd to 96.46 million bpd this year, partly reversing last year’s 9.48mn bpd drop.

Spot crude prices fell in April for the first time in six months, with North Sea Dated and WTI easing month-on-month by 1.7 percent and 1 percent, respectively.

On the global economic projections, the cartel said stimulus measures in the US and accelerating recovery in Asian economies might continue supporting the global economic growth forecast for 2021, now revised up by 0.1 percent to reach 5.5 percent year-on-year.

This comes after a 3.5 percent year-on-year contraction estimated for the global economy in 2020.

However, global economic growth for 2021 remains clouded by uncertainties including, but not limited to the spread of COVID-19 variants and the speed of the global vaccine rollout, OPEC stated.

“World oil demand is assumed to have dropped by 9.5 mb/d in 2020, unchanged from last month’s assessment, now estimated to have reached 90.5 mb/d for the year. For 2021, world oil demand is expected to increase by 6.0 mb/d, unchanged from last month’s estimate, to average 96.5 mb/d,” it said.

The report listed the main drivers for supply growth in 2021 to be Canada, Brazil, China, and Norway, while US liquid supply is expected to decline by 0.1 mb/d year-on-year.

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