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Commodities Exchange Markets, an Incentive for Production

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Commodities Exchange
  • Commodities Exchange Markets, an Incentive for Production

Nigeria has enviable relative advantage in the areas of agriculture and solid minerals. Although we constantly create platforms for discussions on how to modernise our farming methods (be it farming for food crops, minerals and other products), not much is said about how to upgrade our trading methods from the extant spot methods.

At least 60 per cent of the population engages in one form of agricultural activity or the other, albeit mostly on a subsistence level. A nation like the United States, produces her vast agricultural wealth with less than 10 per cent of her population ploughing the fields because of the advantages of mechanised farming. Nigeria, on the other hand, still largely deploys stone-age tools for both production, storage and marketing of primary produce and consequently loses revenue to post-harvest challenges.

Mechanisation, which gives leverage to commercial farming, may not be achieved overnight in Nigeria due to its capital intensive nature, States and local governments can facilitate, in conjunction with private sector stakeholders, the emergence of standardised markets to absorb surplus harvests from farmers using tributary methods to reduce losses and encourage primary production activities, among other benefits. There is a roaring need for the emergence of more sophisticated trading systems for local commodities that make farmers confident that they can sell their produce and manufacturers confident about the quality, availability and consistency of locally sourced feedstock.

For example, 2014 figures showed that Nigeria spent about N630m (this must have doubled or tripled by now due to inflated foreign exchange rates) on importation of wheat alone. Wheat is an important crop applicable in the production of bread, pasta and pastries, in livestock feeds production and so on. The national demand for wheat continues to rise whereas indigenous production is only able to supply about 7.6 per cent of national wheat need; although this is an improvement on previous years when cultivation of wheat nearly went into extinction due to poor patronage. At the time, the millers had claimed that the quality of Nigerian wheat was inferior to the imported ones.

Today, the high cost of foreign exchange has triggered a recent acceptance of locally grown wheat by millers who now buy up whole harvests; leading to a rise in the cultivation of this emerging area of cache. The incentive is that farmers can sell what they produce. This development provides ample proof that beyond the provision of capital, inputs and other supports, market outlets are critical incentives for production. This is where the need for a commodities exchange market becomes pressing; in order to sustain the rising tide in wheat. This will also be work for our solid minerals subsector.

A commodities exchange market provides a standardised outlet for commodities, be they agricultural, solid minerals and so on. In the market, goods are graded and priced tagged such that the need for on spot trading is reduced. You do not have to see the goods and haggle before you can buy. Thus, industries can buy feedstock according to their specifications through those markets; making it easier for both the farmers and the manufacturers to remain in business. In 2014, to salvage discouragement occasioned by a period of glut when millers refused to buy, the government had to mop up wheat harvests in Zamfara State by over 100 per cent of their market value whereas the products are in demand in other parts of the country. Viable commodities bourses, with their attendant Market Information Systems, would have aided in channelling the excess produce to other parts of the country where they were needed.

An upshot of these standardised exchanges would be the emergence of derivative products that can be traded, as is done in other climes, to provide liquidity and stabilise the real sector. Thus, apart from trading in agricultural and mineral produce, contracts based on them like spot prices, forwards, futures and options on futures are traded. For example, a farmer raising wheat can sell a future contract on his produce several months ahead of the harvest time and a milling company could buy the contract ahead to ensure that the price remains the same when delivered. This protects the farmer from price drops and the buyer from price rise. Speculators and investors also trade on the futures contracts for profit ;very much like the way stocks and shares are traded in the capital market.

The importance of a commodities exchange and how it will benefit the solid minerals subsector was well captured in the aspirations of the botched 2002 National Assembly bill for the establishment of a Solid Minerals Development Commission: “The Commission shall operate Joint Venture arrangements with the Organised Private Sector, to establish a private sector-led world class Solid Minerals Commodities Exchange to pave way for the entrance of big time operators into Nigeria’s solid minerals sector in promoting quality control as well as deriving benefits for the nation, which include membership of well-established international commodities exchanges.”

No venturer wants to plough where he is not sure to reap and this has been the bane of Nigeria’s agriculture and solid minerals sectors since the excision of the marketing boards of yesteryears. Entrepreneurs, with government support, need to explore this niche area across the country to facilitate the distribution of goods, risks and profits.

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

Nigeria Pumps 236.2 Million Barrels in First Half of 2024

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markets energies crude oil

Nigeria pumped 236.2 million barrels of crude oil in the first half of 2024, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

This figure represents an increase from the 219.5 million barrels produced during the same period in 2023.

In January, Nigeria produced 44.2 million barrels of crude oil while February saw a slight dip to 38.3 million barrels, with March following closely at 38.1 million barrels.

April and May production stood at 38.4 million barrels and 38.8 million barrels, respectively. June’s output remained consistent at 38.3 million barrels, demonstrating a stable production trend.

Despite the overall increase compared to 2023, the 2024 production figures still fall short of the 302.42 million barrels produced in the same period in 2020.

This ongoing fluctuation underscores the challenges facing Nigeria’s oil sector, which has experienced varying production levels over recent years.

On a daily basis, Nigeria’s crude oil production showed some variability. In January, the average daily production peaked at 1.43 million barrels per day (mbpd), the highest within the six-month period.

February’s production dropped to 1.32 mbpd, with a further decrease to 1.23 mbpd in March. April saw a modest increase to 1.28 mbpd, which then fell again to 1.25 mbpd in May. June ended on a positive note with a slight rise to 1.28 mbpd.

The fluctuations in daily production rates have prompted government and industry leaders to address underlying issues.

Mele Kyari, Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPC), has highlighted the detrimental effects of oil theft and vandalism on Nigeria’s production capabilities.

Kyari emphasized that addressing these security challenges is critical to boosting production and attracting investment.

Kyari also noted recent efforts to combat illegal activities, including the removal of over 5,800 illegal connections from pipelines and dismantling more than 6,000 illegal refineries.

He expressed confidence that these measures, combined with ongoing policy reforms, would support Nigeria’s goal of increasing daily production to two million barrels.

The Nigerian government remains focused on stabilizing and enhancing oil production. With recent efforts showing promising results, there is cautious optimism that Nigeria will achieve its production targets.

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Crude Oil

Oil Prices Steady Amid Mixed Signals on Crude Demand

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Crude oil

Oil prices remained stable on Thursday as investors navigated conflicting signals regarding crude demand.

Brent crude oil, against which Nigerian oil is priced, settled at $85.11 a barrel, edging up by 3 cents, while U.S. West Texas Intermediate (WTI) crude dipped by 3 cents to $82.82 a barrel.

The stability comes as the U.S. economy shows signs of slowing, with unemployment benefit applications rising more than expected.

Initial claims increased by 20,000 to a seasonally adjusted 243,000 for the week ending July 1, prompting speculation that the Federal Reserve might cut interest rates sooner than anticipated. Lower rates could boost spending on oil, creating a bullish outlook for demand.

Fed officials suggested that improved inflation and a balanced labor market might lead to rate cuts, possibly by September.

“Healthy expectations of a Fed rate cut in the not-so-distant future will limit downside,” noted Tamas Varga of oil broker PVM.

However, rising jobless claims signal potential economic easing, which could dampen crude demand.

John Kilduff of Again Capital highlighted the impact of a slowing economy on oil consumption despite a significant drop in U.S. crude inventories last week.

Global factors also weighed on the market. China’s economic policies remain steady, though details are sparse, affecting investor sentiment in the world’s largest crude importer.

Meanwhile, the European Central Bank maintained interest rates, citing persistent inflation.

An upcoming OPEC+ meeting in August is expected to assess market conditions without altering output policy, according to sources. This meeting will serve as a “pulse check” for market health.

Overall, oil prices are caught between economic concerns and hopes of a rate cut, maintaining a delicate balance.

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Crude Oil

Oil Prices Slide on China Demand Concerns, Brent Falls to $83.73

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Crude Oil - Investors King

Oil prices declined on Tuesday for the third consecutive day on growing concerns over a slowing Chinese economy and its impact on global oil demand.

Brent crude oil, against which Nigerian oil is priced, dipped by $1.12, or 1.3% at $83.73 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $1.15, or 1.4%, to close at $80.76.

The dip in oil prices is largely attributed to disappointing economic data from China, the world’s second-largest economy.

Official figures revealed a 4.7% growth in China’s GDP for the April-June period, the slowest since the first quarter of 2023, and below the forecasted 5.1% growth expected in a Reuters poll.

This slowdown was compounded by a protracted property downturn and widespread job insecurity, which have dampened fuel demand and led many Chinese refineries to cut back on production.

“Weaker economic data continues to flow from China as continued government support programs have been disappointing,” said Dennis Kissler, Senior Vice President of Trading at BOK Financial. “Many of China’s refineries are cutting back on weaker fuel demand.”

Despite the bearish sentiment from China, there is a growing consensus among market participants that the U.S. Federal Reserve could begin cutting its key interest rates as soon as September.

This speculation has helped stem the decline in oil prices, as lower interest rates reduce the cost of borrowing, potentially boosting economic activity and oil demand.

Federal Reserve Chair Jerome Powell noted on Monday that the three U.S. inflation readings over the second quarter “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target in a sustainable fashion.

This has led market participants to believe that a turn to interest rate cuts may be imminent.

Also, U.S. crude oil inventories provided a silver lining for the oil market. According to market sources citing American Petroleum Institute figures, U.S. crude oil inventories fell by 4.4 million barrels last week.

This was a much steeper drop than the 33,000 barrels decline that was anticipated, indicating strong domestic demand.

The International Monetary Fund (IMF) also weighed in, suggesting that while the global economy is set for modest growth over the next two years, risks remain.

The IMF noted cooling activity in the U.S., a bottoming-out in Europe, and stronger consumption and exports for China as key factors in the global economic landscape.

In summary, while oil prices are currently pressured by concerns over China’s economic slowdown, the potential for U.S. interest rate cuts and stronger domestic demand for crude are providing some support.

Market watchers will continue to monitor economic indicators and inventory levels closely as they gauge the future direction of oil prices.

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