Markets

No to Electricity Tariff Increase

Published

7 years ago

February 14, 2017

The intense and justified desire of stakeholders to have uninterrupted electricity power recently received a shock from the Nigerian Electricity Regulatory Commission (NERC), the regulator of the power sector when its Acting Chief Executive, Tony Akah, was quoted to have told members of the Senate Committee on Privatisation that without an increase in electricity tariff or a subsidy from the government, Nigeria would not be able to get steady power supply. He attempted a justification of his position by employing the now old-fashioned arguments of destruction of gas pipelines, huge cost being sustained by power companies, foreign exchange scarcity and fall in the rate of the local currency, Naira, lack of cost-effective tariff or subsidy or incentives that would induce the power companies to commit more money to the sector.

Akah’s solutions include a hike in electricity tariff or provision of subsidy or incentives in the form of tax holidays. He equally proposed that cheap bonds should be provided for the power companies to prevent them from passing high electricity bills to consumers. In proposing subsidy as a solution, he was reported to have asserted that since the petroleum sector was still enjoying subsidy, it would not be out of place for the power sector to enjoy subsidy from the government. He crowned his obvious desperation to advocate and obtain tariff increase for the power operators with the point that “….in the absence of subsidy coming in, in the absence of other mechanism coming in, we (NERC) are bound under the law to provide a tariff that will recover cost of investments.” He was also certain that in the event of no increase in electricity tariff or provision of subsidy or incentives, he has no better ideas on how to make progress with the mandate of his Commission.

It is noteworthy that despite this advocacy on behalf of the private power companies, Senator Ben Murray-Bruce, chairman of the Senate Committee on Privatisation, was reported to have impressed on the NERC the salient fact that most workers in Nigeria have not had pay/wage increase in years; workers operate in the same economic environment as the power companies who want a 200 per cent increase in electricity tariff and also that several businesses in the country have been operating under the same conditions, but have not increase their prices.

Beyond this factual position, it is necessary to point out that the government have unduly indulged and supported the power companies since privatisation. Through the Central Bank of Nigeria (CBN), government first provided them the Power and Airline Intervention Fund operated through the Bank of Industry at a concessionary interest rate of seven per cent per annum. Many stakeholders questioned the rationale for such provision of the fund which balance as at end of December 2015, stood at N249.6 billion. The second intervention fund was N213 billion Nigeria Electricity Market Stabilisation Facility operated through the deposit money banks at a concessionary interest rate of 10 per cent per annum. The fund, a collaborative initiative of CBN, Ministry of Petroleum Resources and Power, the Nigerian Electricity Regulatory Commission and the Nigerian National Petroleum Corporation, was partly aimed at “addressing persistent liquidity challenges facing the power and gas sector, and fast-track the development of a viable and sustainable domestic energy market.”

It is rather unfortunate that these huge tax payers’ funds to the privately-owned power companies have failed to provide the much needed “viable and sustainable domestic energy” in the economy. All Nigerians have received are ‘no power’ and ‘endless excuses,’ now followed by the ‘threat’ that, except tax payers continue to make more funds available, power would remain elusive.

Clearly, the power companies that emerged from the privatisation exercise lack the capacity, in all ramifications, to achieve the objectives of privatising the assets. This situation throws up many questions. For instance, was due diligence conducted before reaching the decisions that produced the companies that won in the privatisation exercise? Did the country do its homework very well to ascertain the problems intended to be solved and was it convinced, beyond all reasonable doubts that the chosen power firms would provide the solutions? And how objective and transparent were the processes that brought about the bid winners. It is advisable that when next the government has the need to embark on serious projects of national interest, enough due diligence backed by non-controvertible practical evidences should be taken into consideration. Essentially, these call for good governance at all times.

Given the difficulties of these times, nothing can justifiably support a tariff hike in the power sector. Practicable ideas on how to revive the economy for sustainable growth are required. What the power companies must do as privately owned organisations is to access the CBN intervention funds or access the capital market for equity and/or bonds. Except their owners are running away from dilution of their shareholding, the Nigerian Capital Market will welcome them. Investment wisdom dictates that one per cent share holding in a performing company is far better than 100 per cent ownership of a non-performing business. The companies must also build up their capacity in human capital, equipment and technology resources.

As for the government, it is high time an integrated power mix was pursued. The country is in a position to tap from solar, wind, hydrocarbon resources alongside gas to bring light to Nigeria in significant quantity and quality levels. Besides, the government has the right to diligently find capable power companies across the globe and license them to get this electricity deficit stigma off the neck of Nigeria. It is also incumbent on government in its bid to improve the power situation, to pay attention to how the federating units in the country should be empowered to provide power within their areas of jurisdiction. The competition this will bring about will produce better services to the consumers.

Finally, regulators that seem to or indeed, lack ideas on possible ways forward for power availability, sustainability and affordability, should desist from threats and refrain from advocating against the people the law requires them not only to serve but to protect.

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Samed Olukoya

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

Oil Prices Climb on Renewed Middle East Concerns and Saudi Supply Signals

Published

1 day ago

May 6, 2024

Samed Olukoya

As global markets continue to navigate through geopolitical uncertainties, oil prices rose on Monday on renewed concerns in the Middle East and signals from Saudi Arabia regarding its crude supply.

Brent crude oil, against which Nigeria’s oil is priced, surged by 51 cents to $83.47 a barrel while U.S. West Texas Intermediate crude oil rose by 53 cents to $78.64 a barrel.

The recent escalation in tensions between Israel and Hamas has amplified fears of a widening conflict in the key oil-producing region, prompting investors to closely monitor developments.

Talks for a ceasefire in Gaza have been underway, but prospects for a deal appeared slim as Hamas reiterated its demand for an end to the war in exchange for the release of hostages, a demand rejected by Israeli Prime Minister Benjamin Netanyahu.

The uncertainty surrounding the conflict was further exacerbated on Monday when Israel’s military called on Palestinian civilians to evacuate Rafah as part of a ‘limited scope’ operation, sparking concerns of a potential ground assault.

Analysts warned that such developments risk derailing ceasefire negotiations and reigniting geopolitical tensions in the Middle East.

Adding to the bullish sentiment, Saudi Arabia announced an increase in the official selling prices (OSPs) for its crude sold to Asia, Northwest Europe, and the Mediterranean in June.

This move signaled the kingdom’s anticipation of strong demand during the summer months and contributed to the upward pressure on oil prices.

The uptick in prices comes after both Brent and WTI crude futures posted their steepest weekly losses in three months last week, reflecting concerns over weak U.S. jobs data and the timing of a potential Federal Reserve interest rate cut.

However, with most of the long positions in oil cleared last week, analysts suggest that the risks are skewed towards a rebound in prices in the early part of this week, particularly for WTI prices towards the $80 mark.

Meanwhile, in China, the world’s largest crude importer, services activity remained in expansionary territory for the 16th consecutive month, signaling a sustained economic recovery.

Also, U.S. energy companies reduced the number of oil and natural gas rigs operating for the second consecutive week, indicating a potential tightening of supply in the near term.

As global markets continue to navigate through geopolitical uncertainties and supply dynamics, investors remain vigilant, closely monitoring developments in the Middle East and their impact on oil prices.

Crude Oil

Oil Prices Drop Sharply, Marking Steepest Weekly Decline in Three Months

Published

3 days ago

May 4, 2024

Samed Olukoya

Amidst concerns over weak U.S. jobs data and the potential timing of a Federal Reserve interest rate cut, oil prices record its sharpest weekly decline in three months.

Brent crude oil, against which Nigerian oil is priced, settled 71 cents lower to close at $82.96 a barrel.

Similarly, U.S. West Texas Intermediate crude oil fell 84 cents, or 1.06% to end the week at $78.11 a barrel.

The primary driver behind this decline was investor apprehension regarding the impact of sustained borrowing costs on the U.S. economy, the world’s foremost oil consumer. These concerns were amplified after the Federal Reserve opted to maintain interest rates at their current levels this week.

Throughout the week, Brent experienced a decline of over 7%, while WTI dropped by 6.8%.

The slowdown in U.S. job growth, revealed in April’s data, coupled with a cooling annual wage gain, intensified expectations among traders for a potential interest rate cut by the U.S. central bank.

Tim Snyder, an economist at Matador Economics, noted that while the economy is experiencing a slight deceleration, the data presents a pathway for the Fed to enact at least one rate cut this year.

The Fed’s decision to keep rates unchanged this week, despite acknowledging elevated inflation levels, has prompted a reassessment of the anticipated timing for potential rate cuts, according to Giovanni Staunovo, an analyst at UBS.

Higher interest rates typically exert downward pressure on economic activity and can dampen oil demand.

Also, U.S. energy companies reduced the number of oil and natural gas rigs for the second consecutive week, reaching the lowest count since January 2022, as reported by Baker Hughes.

The oil and gas rig count fell by eight to 605, with the number of oil rigs dropping by seven to 499, the most significant weekly decline since November 2023.

Meanwhile, geopolitical tensions surrounding the Israel-Hamas conflict have somewhat eased as discussions for a temporary ceasefire progress with international mediators.

Looking ahead, the next meeting of OPEC+ oil producers is scheduled for June 1, where the group may consider extending voluntary oil output cuts beyond June if global oil demand fails to pick up.

In light of these developments, money managers reduced their net long U.S. crude futures and options positions in the week leading up to April 30, according to the U.S. Commodity Futures Trading Commission (CFTC).

Crude Oil

Oil Prices Rebound After Three Days of Losses

Published

5 days ago

May 2, 2024

Samed Olukoya

After enduring a three-day decline, oil prices recovered on Thursday, offering a glimmer of hope to investors amid a volatile market landscape.

The rebound was fueled by a combination of factors ranging from geopolitical developments to supply concerns.

Brent crude oil, against which Nigeria oil is priced, surged by 79 cents, or 0.95% to $84.23 a barrel while U.S. West Texas Intermediate (WTI) crude climbed 69 cents, or 0.87% to $79.69 per barrel.

This turnaround came on the heels of a significant downturn that had pushed prices to their lowest levels since mid-March.

The recent slump in oil prices was primarily attributed to a confluence of factors, including the U.S. Federal Reserve’s decision to maintain interest rates and concerns surrounding stubborn inflation, which could potentially dampen economic growth and limit oil demand.

Also, unexpected data from the Energy Information Administration (EIA) revealing a substantial increase in U.S. crude inventories added further pressure on oil prices.

“The updated inventory statistics were probably the most salient price driver over the course of yesterday’s trading session,” said Tamas Varga, an analyst at PVM.

Crude inventories surged by 7.3 million barrels to 460.9 million barrels, significantly exceeding analysts’ expectations and casting a shadow over market sentiment.

However, the tide began to turn as ceasefire talks between Israel and Hamas gained traction, offering a glimmer of hope for stability in the volatile Middle East region.

The prospect of a ceasefire agreement, spearheaded by Egypt, injected optimism into the market, offsetting concerns surrounding geopolitical tensions.

“As the impact of the U.S. crude stock build and the Fed signaling higher-for-longer rates is close to being fully baked in, attention will turn towards the outcome of the Gaza talks,” noted Vandana Hari, founder of Vanda Insights.

The potential for a resolution in the Israel-Hamas conflict provided a ray of hope, contributing to the positive momentum in oil markets.

Despite the optimism surrounding ceasefire talks, tensions in the Middle East remain palpable, with Israeli Prime Minister Benjamin Netanyahu reiterating plans for a military offensive in the southern Gaza city of Rafah.

The precarious geopolitical climate continues to underpin volatility in oil markets, reminding investors of the inherent risks associated with the commodity.

In addition to geopolitical developments, speculation regarding U.S. government buying for strategic reserves added further support to oil prices.

With the U.S. expressing intentions to replenish the Strategic Petroleum Reserve (SPR) at prices below $79 a barrel, market participants closely monitored price movements, anticipating potential intervention to stabilize prices.

“The oil market was supported by speculation that if WTI falls below $79, the U.S. will move to build up its strategic reserves,” highlighted Hiroyuki Kikukawa, president of NS Trading, owned by Nissan Securities.

As oil markets navigate a complex web of geopolitical uncertainties and supply dynamics, the recent rebound underscores the resilience of the commodity in the face of adversity.

While challenges persist, the renewed optimism offers a ray of hope for stability and growth in the oil sector, providing investors with a semblance of confidence amidst a volatile landscape.