Wednesday, May 09, 2018/04:07 PM / Proshare Research
Certainly, oil never runs out of mock games, besides there is something for everyone. The mock games have become more vivid than ever before, as exogenous factors tend to shock oil prices.
Thereby underlining the new reality whereby policy uncertainty, trade conflicts, and geopolitical tension has consistently rattled oil price positively. At the same time, one must not ignore the fact that there has been a bolstering in animal spirit, which provided the momentum for the second wind. However, in recent time price seemed to be driven by shocks rather than fundamentals.
Fig 1: Prices of Selected Reference Crude
Therefore, it was not surprising to see oil price in reaction to series of culminated events soar to $75.50 per barrel on Tuesday of May 08, 2018.
Most importantly, the recent decision to pull out of the Iranian nuclear deal by the United States on Tuesday, gradually calibrating back to political sanctions fuelled the upswing in oil price.
The reality of shielding substantial chunk of Iranian crude exports from the global market coupled with further inflaming geopolitical tension in the Middle East led to oil price climbing to a new three and a half year high, whereby oil prices previous three and half year high was $74 .7 per barrel on 24th November 2011 prior to Tuesday price attainment.
Fig 2: Oil Price from 2014 to 2018
Beyond the grim picture of the Iranian currency, the Rial plummeting in response to the on-going dynamic, the Organization of Petroleum Exporting Countries (OPEC) finds themselves up against a fast ticking clock and how? The persistent growth in American rig poses a threat to the price backwardation and could affect the unwinding of production cap
Recent data from Baker Hughes, stated oil and Gas rigs in the United States stand at 834 and 196. Thus, reflective of a 12% increase in oil rigs across America compared to the end of 2017, at the same time making it a two year high.
The increase in oil price has eroded the earlier indifference to the market, thereby allowing them to return to the market in their droves. Therefore, it is not surprising to see why OPEC has scaled back on production for the second month in a row.
Fig 3: Oil and Gas Rigs in the United States
So far, the bonny light -Nigeria’s crude has been the biggest beneficiary from the swell in oil price compared to another reference crude. Evidently, the upward trajectory in oil price will improve revenue accretion providing some respite to the fiscal authorities.
In the same vein, the on-going dynamic will bolster the nation’s balance of trade and depresses the non –performing loan in the banking sector.
It is expected that improvement in oil earnings will be positive for system liquidity, thus denting market rates slightly. The current dynamic allows the Central Bank to continue to build on the nation’s foreign reserve accumulation.
We are of the opinion that there will be an increase in the amount subsidy that will be underwritten by National Nigerian Petroleum Corporation, due to the low refining capacity in the nation.
Obviously, a more cautious approach to price must be maintained as the existing dynamic remain ahead of fundamentals and possibility of having oversupply lurks in the shadow. Such is important in fencing macro Prudential’s against the new normal of growing of pockets risk offs and risk on.
Even though the bonny light has been the greatest beneficiary from these shocks, regardless, there is a need to further employ more future instruments with regards to hedging off risk to price in a more than ever before volatile commodity market.
The inability to employ more future instrument could be precarious at this point in time. Moreover, such shocks could be transitory, as the political end has not entirely written off negotiations.