Nairametrics| The recent gains by the Central Banks policy of selective supply windows for the sale of dollars is under major threat. That threat is from a familiar foe.
Oil prices have extended losses this week with the Brent crude sliding by 2.4% to about $47 this week. This is just above the crude oil budget benchmark of $42.5.
Why the drop
- Shale oil production has increased in the last few months despite efforts by OPEC member to use supply cuts to trigger higher prices.
- Shale oil producers in the US have had 11 straight weeks of expansion in production.
- Bloomberg reports this is the longest run of gains since 2012.
- Shale producers are typically incentivised to produce more when oil prices are higher.
- A ramp up of oil production in the US, increases the supply glut which OPEC members have been trying to eliminate by cutting back on their supplies.
How does this affect the CBN
- The CBN Forex policy is currently hinged on a comfortable balance in external reserves.
- Higher external reserves is a function of oil prices and production.
- Nigeria has recently made major gains on the production side, following the relative peace being enjoyed in the Niger Delta. However higher oil prices creates an incentive to even produce more thus creating a ding-dong effect on prices.
- Nigeria has targeted oil production level of 2.2mbpd. Lower oil prices also discourages investments in the oil and gas sector.
- It is also likely to continue to increase the non-performing loans of commercial banks, a major factor in the health of the financial sector.
- If oil prices continue to slide, it could impact negatively on government revenue as well as CBN reserves.
- Lower government revenues means states have less allocation from the center which could cascade into community projects and handouts that affect militants.
- It could also affect CBN’s dollar supply latency thus affecting its ability to maintain its target of a stable exchange rate via demand and supply management.
Any immediate threat to exchange rate
- We do not see any immediate threat to exchange rate at least on the short run, provided government maintain its production levels.
- However, we do expect slight volatility in the investment window of the forex market, as sellers react to events in the international markets.
- There could also be a slight push back in the CBN’s meticulous roll-out plans to ease forex controls and usher in a more market driven FX policy.
- On the long-term, a continuous drop in crude oil to prices will affect the longterm outlook of the exchange rate.
- We thus envisage a weakening of the Naira if oil prices fall below $40.
- A price above N400 is not unlikely.