- Falling Oil Prices Threaten Nigeria’s Earnings, Reserves Accretion
The steady rise of Nigeria’s foreign exchange earnings and build-up of external reserves, which started about five months ago, is already under threat from exogenous shock arising from the recent fall in oil prices.
Nigeria depends on oil sales for 90 per cent of its foreign exchange earnings and 70 per cent of total revenue.
However, rising shale oil production in the United States in recent months has dampened production cuts carried out by members of the Organisation of Petroleum Exporting Countries (OPEC) and Russia to shore up prices.
According to Reuters, oil prices slid 2 per cent on Thursday, extending the previous session’s dive that brought prices to the lowest levels this year, as record U.S. crude inventories fed doubts about whether OPEC-led supply cuts would reduce a global glut.
U.S. crude prices fell through the $50 a barrel support level, with market participants unwinding a massive number of bullish wagers they had amassed after a deal by top global oil producers to limit output.
On Wednesday, crude also tumbled more than 5 per cent, its steepest dive in a year, after data showed crude oil stocks in the U.S., the world’s top oil consumer, swelled by 8.2 million barrels last week to a record 528.4 million barrels, well above forecasts of a 2 million barrel build.
Although the impact of sliding oil prices are yet to be felt in Nigeria, market analysts have cautioned that the external shocks would eventually hit the country’s foreign earnings and reserves.
Last Thursday, Nigeria’s external reserves rose to $30.039 billion, according to the latest data from the Central Bank of Nigeria (CBN).
The central bank’s data showed that the reserves, derived primarily from oil sales, recorded a steady increase of between 2.3 and 2.75 per cent since January 2017.
Other than oil prices, a drop in militancy in the Niger Delta has also led to an improvement in the country’s foreign exchange earnings.
However, following the recent changes in the CBN’s foreign exchange (FX) policy and its renewed bid to reduce the gap between the interbank and parallel market rates, there have been increased interventions in the FX market by the central bank.
So far, the CBN has pumped $1.370 billion into the FX market since the measures were announced.
Owing to this, Nigeria’s external reserves, which give the CBN its firepower, have come under close scrutiny.
The naira closed at N463 to the dollar at some parallel market points on Friday.
At $30.039 billion, the country’s reserves have increased by $4.196 billion or 16 per cent, compared with the $25.843 billion at the end of 2016.
But concerns continue to heighten over the central bank’s ability to sustain its intervention in the market with the oil prices recording their biggest fall this year last week.
Speaking in a chat on Sunday, the Director General of the West African Institute of Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, pointed out that if oil prices continue to slide, it would definitely have a negative effect on the country’s external reserves.
“Let’s just hope that it rises again. That is why we have always said that the price of oil is very volatile. That is why you cannot depend on it for long-term development.
“Certainly, if this continues, it would affect the amount of dollars the CBN can put in the market.
“That is why some people have been asking if what the CBN has been doing in the past three weeks is sustainable.
“Effectively, in the long term, the structure of the Nigerian economy has to change towards earning FX from other sources instead of crude oil. We must also understand that the U.S. has stopped buying our oil because of the shale oil produced in the country,” Ekpo added.
The Financial Derivatives Company Limited stated in a recent note that the ability of the CBN to sustain its fight against currency speculation as well as preserve the value of the naira would depend largely on the country’s crude oil earnings.
Despite mounting concerns, there were indications at the weekend that the CBN would inject more FX into the market early this week.
Information about the central bank’s action became rife over the weekend, sending jitters among currency speculators.
When contacted, the acting Director, Corporate Communications of the CBN, Mr. Isaac Okorafor, confirmed that the central bank was determined to sustain liquidity in the FX market this week in order to enhance accessibility for genuine end-users.
Okorafor also cautioned dealers in FX not to engage in any unwholesome practices detrimental to the smooth operations in the market, warning that the CBN would impose heavy sanctions on any organisation or official involved in such acts.
Refinitiv Expands Economic Data Coverage Across Africa
Building on its commitment to drive positive change through its data and insights, Refinitiv today announced the expansion of its economic data coverage of Africa. The new data set allows investment managers, central bankers, economists, and research teams to use Refinitiv Datasteam analytical data for detailed exploration of economic relationships and investment opportunities among data series covering the African continent.
Securing reliable, detailed, timely, locally sourced content has not been easy for economists who have in the past had to use international sources which often can take many months to update and opportunities to monitor the market can be missed. Because Africa is a diverse continent, economists and strategists need more timely access to country-specific data via national sources to create tailored business, policy, trading and investment strategies to meet specific goals.
Africa continues to develop critical infrastructure, telecommunications, digital technology and access to financial services for its 1.3bn people. The World Bank estimates that over 50% of African inhabitants will be under 25 by 2050. This presents substantial opportunities for investors who can spot important trends and make informed decisions based on robust and timely economic data.
Stuart Brown, Group Head of Enterprise Data Solutions, Refinitiv, said: “Africa’s growing, dynamic and fast evolving economies makes it a focal point for financial markets today and in the coming decades. As part of LSEG’s commitment to empowering the global markets with accurate and timely data, we are excited about making these unique datasets available via the Refinitiv Data Platform. Our economic data coverage of Africa will provide our customers with deeper and broader inputs for macroeconomic analyses and enable more effective investment strategies and economic research.”
Refinitiv Africa economic data coverage:
- Africa economics content comprises around 500,000 nationally sourced time series data covering 54 African nations
- Content is sourced from national statistical offices, central banks and other key national institutions
- The full breadth of economics categories in Datastream including national accounts, money and finance, prices, surveys, labor market, consumer, industry, government and external sectors
- International sources including OECD, World Bank, IMF, African Development Bank, Oxford Economics & more provide comparable data & forecasts across the continent
Refinitiv® Datastream® has global macroeconomics coverage to analyze virtually any macro environment, and better understand economic cycles to uncover trends and forecast market conditions. With over 14.2 million economic times series map trends, customers can validate ideas and identify opportunities using Refinitiv Datastream. Access its powerful charting tools, 9,000 pre-built chart templates and chart studies for commonly used valuation, performance, and technical and fundamental analysis.
Refinitiv continually grows available data – the China expansion in 2019 covered a unique combination of economic and financial indicators. Refinitiv plans to expand Southeast Asia covering Thailand, Vietnam, Philippines and Malaysia with delivery expected in 2021. This ensures that Refinitiv will have much needed emerging market economic content.
Oil Rises on Drawdown in U.S. Oil Stocks, OPEC Demand Outlook
Oil prices rose in early trade on Wednesday, adding to overnight gains, after industry data showed U.S. oil inventories declined more than expected and OPEC raised its outlook for oil demand.
Brent crude futures rose 28 cents, or 0.4%, to $63.95 a barrel at 0057 GMT, after climbing 39 cents on Tuesday.
U.S. West Texas Intermediate (WTI) crude futures similarly climbed 28 cents, or 0.5%, to $60.46 a barrel, adding to Tuesday’s rise of 48 cents.
Oil price gains over the past week have been underpinned by signs of a strong economic recovery in China and the United States, but have been capped by concerns over stalled vaccine rollouts worldwide and soaring COVID-19 infections in India and Brazil.
Nevertheless, the Organization of the Petroleum Exporting Countries (OPEC) tweaked up its forecast on Tuesday for world oil demand growth this year, now expecting demand to rise by 5.95 million barrels per day (bpd) in 2021, up by 70,000 bpd from its forecast last month. It is banking on the pandemic to subside and travel curbs to be eased.
“It was a welcome prognosis by the market, which had been fretting about the impact the ongoing pandemic was having on demand,” ANZ Research analysts said in a note.
Further supporting the market on Wednesday, sources said data from the American Petroleum Institute showed crude stocks fell by 3.6 million barrels in the week ended April 9, compared with estimates for a decline of about 2.9 million barrels from analysts polled by Reuters.
Traders are waiting to see if official inventory data from the U.S. Energy Information Administration (EIA) on Wednesday matches that view.
Market gains are being capped on concerns about increased oil production in the United States and rising supply from Iran at a time when OPEC and its allies, together called OPEC+, are set to bring on more supply from May.
“They may have to contend with rising U.S. supply,” ANZ analysts said.
EIA said this week oil output from seven major shale formations is expected to rise by 13,000 bpd in May to 7.61 million bpd.
African Energy Developments Demand Sustained Investment With New Projects in Mozambique, Tanzania, Uganda, and Senegal
In the past twelve months, the African energy sector has seen several encouraging developments – in the form of both Foreign Direct Investment (FDI) and strategic partnerships – that have advanced the sustainable development of its natural resources. In fact, despite a global downturn in investment in 2020, FDI flows to developing economies accounted for 72% of global FDI, the highest share to date. Given the magnitude of Africa’s oil and gas reserves – not to mention its abundant renewable resource wealth – the continent remains a highly attractive market for inbound investment, which is vital for its growth.
Take Uganda, for instance, which is home to one of the largest onshore discoveries in sub-Saharan Africa. Following multiple petroleum discoveries in Uganda’s Albertine Graben – estimated to contain 6.5 billion barrels of oil, of which 1.4 billion are considered recoverable – foreign investments into the country are expected to reach nearly $20 billion. Last April, Total E&P Uganda B.V. signed a Sale and Purchase Agreement with Tullow Oil PC, through which Total will acquire Tullow’s entire 33.34% interests in Uganda’s Lake Albert development project and the East African Crude Oil Pipeline (EACOP). Five months later, the Ugandan Government and Total signed a host government agreement for EACOP, representing a significant step toward reaching a final investment decision. The deal pushes along an extended development process – slowed by infrastructure issues, tax complications, then COVID-19 – that not only promises to bring first oil by 2022, but also provides a pathway to monetization via associated transport infrastructure.
In addition to developments at Lake Albert, the Ugandan Government has proven its commitment to attracting FDI to its hydrocarbon sector through its second licensing round held last year, as well as its invitation to local and foreign entities to forge joint-venture partnerships with the Government. By prioritizing the establishment of mutually beneficial partnerships, the emerging East African producer aims to facilitate the successful transfer of skills, knowledge and technology, initiating an influx of technical expertise and working capital into the country.
“Those who have been locked out from access to opportunity want the same from the energy sector that the energy sectors want from governments. We must not forget local content, local jobs, local opportunities especially for young people and women” Stated NJ Ayuk Executive Chairman of the African Energy Chamber.
Meanwhile, in West Africa, Senegal has been reaping the rewards of a long-standing partnership with Germany, which has resulted in more than one billion Euros in funding, including significant support for small-scale power plants and renewable energy projects. Holding sizeable potential for solar and wind energy development, Senegal serves as a regional leader in renewable deployment as a means of rural electrification. Indeed, energy is a central component of poverty alleviation across Africa, with electricity access enabling greater independence, clean cooking and potable water, as well as dramatically improving the well-being of individuals, businesses and communities alike. Rural populations are cognizant of the challenges posed by a lack of stable electricity supply – increased urban migration, lack of access to basic services, low economic competitiveness, to name a few – and distributed renewables can represent the fastest and least expensive path to electrification.
European interest in Senegal has shed light on and served as a model for co-operation opportunities between renewable-rich African countries and developed partners, which offer cutting-edge technologies and technical expertise to transform raw resources into viable off-grid and mini-grid solutions.
Furthermore, while the cost of deploying renewable technology has never been lower, the availability of renewable-focused capital has never been higher. Investment in commercial and industrial solar has demonstrated resilience against the pandemic, continuing to be seen as a safe investment in light of rising utility costs and increasing distribution of both solar and financial technologies. Yet resource potential and low costs of equipment are not enough; Senegal and other resource-rich African nations require active investor interest and strong government support to unlock diversified energy mixes. In turn, a lack of investment represents a pointed threat to the achievement of long-term energy security.
“Young people and women have shown their great resilience, and it is our hope we close these deals in the renewable energy sector, Africans can have a sense of some hope that they will be included in the industry contracts and opportunities. It is no longer correct for the African to be the last hired and the first fired” Concluded Ayuk.
Moreover, without sustained levels of FDI continuing to move the needle on oil, gas and renewable developments, energy export revenues run the risk of being stranded and resources left undeveloped. For emerging producers like Uganda – as well as Tanzania, Kenya, Mozambique, among several others – this would mean foregoing critical government revenues that could aid in a much-needed, post-COVID-19 economic recovery. FDI is vital to Africa’s growth, and while it may be challenging to procure capital in a tepid global economy, it is even more difficult not to. Yes, COVID-19 has put emerging producers in a tough spot: new exploration is seen as risky, and new producers lack existing assets or low-cost development of marginal fields on which to fall back. However, it is not an option to slow or postpone time-sensitive developments that promise to harness natural resource wealth and make sustainable improvements in standards of living across the continent. Africa requires a sustained flow of investment and has proven time and again that it offers the scope of projects and magnitude of resources that are worthy of foreign capital.
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