Nigeria's Average Oil Production Declined by 13.9% to 1.52 mbpd QoQ


Monday, August 10, 2020 / 02:49 PM / By Comercio Partners Asset Mgt / Header Image Credit: The Mirror

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Report Summary 

  • The Macroeconomy
  • The Fed stays the course as coronavirus cases surge.
  • Rising debt levels across the globe could be the new cause for concern.
  • U.S.-Sino relations deteriorates.
  • Ban on interstate travel was lifted


The Financial Markets

  • There was a deep lull in the Equities market following the prior busy months.
  • Activity in the I&E FX Window remained muted.
  • The Fixed Income market maintained its bullish momentum across the board.


Our Expectation for the Coming Months

  • There could be some downward pressure on oil prices as a second wave looms.
  • The central bank's move to end official foreign-exchange supply for corn imports to boost local production could boost the inflation numbers.
  • Opportunities for bargain hunting and profit taking may be limited as earnings season draws to a close.

Equities, Oil, And U.S.-China Relations Make A Comeback

There are now over 3 million known coronavirus cases in the U.S. as more states reported record number of new infections. Certain states are considering reintroducing some form of lockdown after massive 24-hour spikes. Consequently, in a move that was largely expected, the U.S. Federal Reserve held interest rates steady, a decision that was based on the lukewarm outlook on the coronavirus ravaged economy. Besides leaving rates unchanged, the Federal Open Market Committee (FOMC) expressed its commitment to maintain its bond purchases and array of lending and liquidity programs associated with the virus response which include dollar liquidity swaps and temporary repo operations through March 2021. The swap lines were established as a response to the pandemic to keep U.S. dollars flowing to entities including global central banks in need of the currency. While the FOMC did not indicate under what conditions it would take to change the rates, most market participants are of the opinion that there would be no rate increases until at least 2024 given the tepid outlook of the economy and the prospects of ultra-low inflation (U.S. inflation is currently at 0.5%, a far cry from the 2% Fed target). U.S. stocks rose after the Fed signaled it would continue to provide stimulus amid the pandemic. Fed Chairman, Jay Powell, has continued to rule out negative rates for the time being in favor of more aggressive forward guidance. Some Fed officials have suggested that a forward guidance tactic could be a pledge to not tighten policy until the 2% inflation target is reached.


In the wake of the coronavirus pandemic, a new crisis appears to be developing, one of a financial nature. In the first 7 months of 2020, corporate debt has grown by $1 trillion. This represents a 12% increase, up from 82 last year, bringing global corporate debt to $9.3 trillion. In the years prior to the pandemic, corporate debt was mainly fueled by mergers and acquisitions, share buybacks and dividends. This year however, the increase in corporate debt was largely driven by the effects of the coronavirus pandemic. As at July 13", based on a survey of 900 global corporations, U.S. companies led the world in corporate debt coming in at $3.9 trillion; Germany came in a distant second at $762 billion. While lending markets were virtually closed in March as the virus ravaged society, the intervention of the Fed in the corporate debt market helped fuel the market, including high yield debt issues from firms with lower credit ratings.


The relationship between China and the United States continues to deteriorate. President Trump ended Hong Kong's special status in a bid to punish the Chinese government. He also ordered the closure of the Chinese consulate in the city of Houston amid accusations of spying. In retaliation, the Chinese government ordered the shutdown of the American Consulate in the city of Chengdu. The abrupt order given by the American government was called an "unprecedented escalation". U.S.- China ties have worsened sharply this year over issues ranging from the coronavirus and telecoms- gear maker Huawei to China's territorial claims in the South China Sea and clampdown on Hong Kong.


On the home-front, at the Monetary Policy Committee meeting, the Apex Bank maintained the status quo keeping the Monetary Policy Rate at 12.50%, the Cash Reserve Ratio at 27.5%, the liquidity ratio at 30% and the asymmetric corridor at +200/-500 bps. The Apex Bank Governor, Godwin Emefiele, explained that the CBN maintained the status quo to evaluate the effectiveness of the 100bps cut that occurred in May.

Additionally, the Federal Government has lifted the ban on interstate travel and local flights have resumed. In addition, arrangements would be made for graduating students in Primary 6, JS3 and SS3 to resume and prepare for examinations with the rest of the student body joining them in the coming month while observing all safety protocols.


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The Macro Economy


GDP Growth & Oil Production

GDP Growth & Oil Production According to data from OPEC's direct sources, Nigeria's oil production for the month of June stood at 1.41 mbpd, a 1.7% decline over the 1.44 mbpd recorded in the month of May. On a quarter on quarter basis, Nigeria's average oil production declined by 13.9% to 1.52 mbpd. Recall that Nigeria was among the countries that produced beyond their agreed quota in the 9.7 mbpd cut instituted by the OPEC+ in May. Nigeria was only able to achieve a 19% compliance rate. However, at the last OPEC+ meeting, Nigeria and other over-producing countries were compelled to cut production by 400,000 barrels.


OPEC and allies such as Russia agreed in a meeting held in the month of July to ease record oil supply curbs from August. OPEC+ has been cutting output since May by 9.7 million barrels per day, or 10% of global supply, after the virus destroyed a third of global demand. From August, cuts will officially taper to 7.7 million bpd until December. However, fears of a second wave of coronavirus are weighing heavily on the market and OPEC+ said that "a second strong wave" could deepen the hit to demand to 11 million bpd this year. On a week-on-week basis, Brent futures prices barely moved as it gained 1% to $43.13/barrel, however on the day of the OPEC+ meeting, Brent futures jumped as high as $43.79.


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Nigerian headline inflation accelerated for the 10th straight month in June 2020 as restrictions on access to foreign exchange and continued border closures drove up prices - it was up by 16 bps. The Consumer Price Index (CPI) which measures inflation maintained its uptick as headline inflation rose to 12.56% YoY, from 12.40% in May. The uptick largely reflects the increase in both the food and core components, which rose to 15.18% and 10.13% in June 2020 from 15.04% and 10.12% in May 2020, respectively. On a month-on-month basis, the Headline index was up by 1.21%, 4 bps higher than the 1.17% recorded in May.


The food index, which accounts for more than half of the inflation basket and the main driver behind the surge in inflation, rose 15.18%, the highest since March 2018, which represents a 14-bps increase from 15.04% in May 2020.


The Central Bank of Nigeria extended foreign exchange restriction to the importation of maize/corn, bringing the number of items on the restricted list to 44. The Apex Bank explained that the forex restriction on maize was aimed at increasing local production of the commodity while stimulating economic recovery, safeguarding rural livelihoods and increasing jobs.


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Capital Importation and Foreign Exchange Reserves

In the month of July, the total foreign capital inflow into the Nigerian economy through the I&E FX Window improved significantly by 50% to $575.4 million from $383 million driven by significant increases in inflows from FPls (69%) and inflows from other local sources apart from the CBN (61%) as inflow from the Apex bank remained meager. However, total inflow through the window remained significantly depressed relative to the average monthly inflow of $3.68 billion recorded in Q1 2020 before the effects of the coronavirus pandemic weighed in. Foreign Portfolio Investments (FPls) inflows rebounded after five consecutive months of decline as foreign investors seemed to have regained slight confidence amid the coronavirus pandemic.


The 30-day moving average of Nigeria's foreign exchange reserves declined for the second consecutive month in June 2020 as the external reserves declined by 0.9% to $35.88 billion from $36.20 billion.


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Purchasing Managers' Indices

Purchasing Managers' Indices Expectedly, the Manufacturing PMI in the month of July stood at 44.9 index points, indicating a contraction in the manufacturing sector for the third consecutive month, although the metric indicated an improvement relative to its level in the previous month. Of the 14 surveyed subsectors, only the transportation equipment subsector reported growth (above 50% threshold) in the review month, while non-metallic mineral products sector reported no change. The remaining 12 subsectors reported contraction.


The composite PMI for the non-manufacturing sector stood at 43.3 points in July 2020 indicating a contraction for the fourth consecutive month, but similar to the manufacturing PMI, an improvement over the previous month. Specifically, a month-on-month analysis of the movement in the sub-indices indicated that non-manufacturing economic activities significantly improved in July 2020 as it rose from 35.7% in June 2020 to 43.3%in July 2020. Of the 17 surveyed subsectors, 2 subsectors - arts, entertainment and recreation, and transportation and warehousing - reported growth (above 50% threshold) in the review month while the other 15 subsectors reported declines.

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Financial Markets


Fixed Income Market 

The bullish trend in the Fixed income market strengthened further in the month of July with yields across all maturities trading at historically low levels. Monthly yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with average yields on the sovereign bonds with 3- year, 5-year, 10-year and 20-year maturities declining by 176 bps, 320 bps, 192 bps and 110 bps, respectively.


The Bond market maintained its post auction rally at the beginning of the month as demand was witnessed across board, particularly on the long maturities albeit on a less aggressive note. However, towards the end of the month, the bullish momentum picked up further as the unmet bid at the auction filtered into the secondary market.

The Bond auction held on 22"° July 2020 closed relatively strong with a bid to cover of 2.6x and stop rates printing as follows; 6-year, 15-year, 25-year, and 30-year at 6.00%, 9.50%, 9.80% and 9.95% respectively.


The MPC meeting was also held on 22nd July 2020. The Central Bank of Nigeria left its benchmark interest rate unchanged at 12.5% as policymakers said that the previous rate cut was having a positive impact as credit growth had increased significantly in the economy.


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Foreign Exchange Market

For the month of July, the Naira depreciated at the I&E FX Window as the average exchange rate of the currency to a unit of the Dollar rose by 0.28% to 387.48 in July. Total I&E inflows for the month stood at $575 million compared to $384 million recorded last month. Inflows from FPls advanced by 69% month-on- month to $64 million in July from $38 million. However, total monthly turnover slowed by 5.5% to $937 million. Other local sources remain the biggest contributor to the I&E window, accounting for 80% of total inflows through the window. The Apex bank has not indicated any intention to intensify support at the window.

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Equities Market

The first month in the 3'¢ quarter of the year saw the equity market sustain the lull seen in the previous month. The trickle of half year results did not do much to lift the sour mood in the local bourse. Lafarge recorded a 2.25% gain in H1 2020 revenue compared to Hi 2019. The company's Profit after tax was significantly up by 158.96% to N23 billion as the ticker continues to enjoy the benefit of having deleveraged its balance sheet. FBN Holdings, the parent company of First Bank, equally posted impressive results, growing its topline by 5.82% while growing profit after tax by 56.33% to N49 billion. The Oil & gas (-13.30% MoM) and consumer (-8.80% MoM) sectors suffered huge declines as investors reacted to the non-impressive results released. Tickers in these sectors continue to battle with challenges instigated by the Covid-19 pandemic and low oil prices. Activity in the local bourse remains subdued though there has been decent demand for tech and industrial names.


FX repatriation remains an issue for foreign portfolio managers who had to adopt unorthodox means to pull out funds. They exit some positions by buying and selling fungible stocks though volumes and value traded are not significant.


The NSE ASI ended the month of July on a positive note, gaining 0.88% mom at 24,693.73 with a negative year-to-date return of 8.00%.

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Our Expectations for The Coming Months

The decision by OPEC+ to ease its production cuts by 2 mbpd indicates that on the supply side, oil appears to be stabilizing. However, the recent spike in coronavirus cases and likelihood of more cities shutting down again could exert more downward pressure on the price of oil. Inflation in Nigeria has been above the 9% upper limit of the central bank's target band for five years and will likely continue to accelerate as border closures, initially ordered in August 2019 to curb smuggling of rice and other products, remain in place. The central bank's move to end official foreign- exchange supply for corn imports to boost local production could boost the inflation numbers.


The improvement seen in both the Manufacturing and Non-manufacturing sectors, albeit at a slower rate can be attributed to the continued recovery after the disruption caused by the coronavirus pandemic. The growth cycle continues for the second straight month after three prior months of COVID-19 disruptions. Demand and consumption continue to drive expansion growth, with inputs remaining at parity with supply and demand. We expect to see stifled growth within this space until the domestic and global economy reopens fully.


We expect the bullish trend in the fixed income market to ease this month on the back of the sharp decline in yields. Nevertheless, we expect the paucity of instrument coupled with increased liquidity to continues to provide support for yields in near term.


We expect foreign inflows to remain at current levels whilst anticipating the World Bank's decision regarding its $1.5 billion loan that should have been decided late July. We expect foreign inflow and Foreign Exchange Reserves to improve in this month on the back of the anticipated World Bank $1.5 billion loan facility.


The coming months will be characterized by short periods of bargain hunting and profit taking in the equities market as the result season is almost over. Factors that could drive activity in the market include progress in tackling the coronavirus globally and FX repatriation. 


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