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Opinions

OPINION: Should the Federal Government revise the 2020 budget benchmark to $25 a barrel?

Nigeria should be mindful that demand does not necessarily translate to sales at the headline futures contract price. The market is still recovering from the super-contango it faced a month ago.

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FG inaugurates steering committee on Covid-19 economic recovery, #EndSARS: FG creates new N25 billion Youth Fund, to increase to N75 billion in 3 years, taxes, tax, IMF, business, FAAC disbursed N617billions in April, as South-South scoop N72billions, VAT, Finance Minister, Zainab Ahmed says Nigeria VAT collection rate is low, NBC, Rite Foods, others to pay new tax as FG identifies new revenue streams ,,Finance Minister reveals how World Bank, AfDB pushed FG into requesting Chinese loan 

Three weeks ago, Mrs. Zainab Ahmed, the Nigerian Minister of Finance, Budget and National Planning, at a web conference on Citizens’ Dialogue Session, said the Federal Government was deliberating on revising the 2020 budget oil price benchmark to $20. She disclosed that this was a fair reflection of the oil price level while discussing on Government’s Fiscal Policy Decisions on the fall in Oil Prices and the COVID-19 pandemic. A few days after, it was reported that the Federal Government had approved new budget benchmarks which was at $25 per oil barrel, and a target production rate of 1.94 million barrels per day.

In my last article, now that oil is back, I noted several elements behind the resurgence in oil prices in the last few weeks. Factors are ranging to an increase in demand from China, production shut-ins from OPEC+ nations, a reduction in the number of active rigs to the lowest level seen in 11 years by U.S. drillers which trimmed output further and ease in lockdowns in globally.

On early hours of Tuesday morning at the Asian session, Brent traded at $35.60, a dip from Thursday highs at $36.98. Very few oil traders and energy analysts envisaged prices to be at these levels considering the unprecedented collapse of prices on the 20th of April 2020 were oil prices traded at negative prices. Recalling that period, everyone who had sparse knowledge on the fundamentals of oil gave their outlooks and predicted that that was the end of oil. It is similar to the effect “The Last Dance” has now, with everyone giving their two cents on Michael Jordan’s career despite never watching a complete game he played.

So, could it be said that the Government adjusting the benchmark to $25 is a little bit low, or would $35 be a fair benchmark given the recent improvements in the oil sector? The answer depends really on how quick events get back to normal or the “new normal” as the new cliché goes by these days or if there would be a second wave of infections because of premature easing of lockdowns and poor compliance in social distancing.

(READ MORE:Brent crude surges pass $36, as major oil producers stick to their pledge on oil output cut)

In March 2020, Investment Bankers Goldman Sachs cut their 2nd Quarter Brent price forecasts to $30 per barrel. This forecast was following the aftermath of the oil price war between Saudi Arabia and Russia after a failed agreement on output cuts. Two months down the line, things have considerably improved, and we now have an output deal. Historically, this is one of the most significant output deals as OPEC+ nations agreed to take 9.7million barrels a day out of the oversupplied market. As Nairametrics reported after the OPEC+ deal, Nigeria’s contribution to the cuts would be to produce 1.412 Million Barrels per day, 1.495 Million Barrels per day, and 1.579 Million Barrels per day respectively for the corresponding periods in the agreement. These production rates do not align with what the Government approved (1.94 million barrels a day) at the virtual Federal Executive council meeting.

How then should the 2020 Budget Oil Price Benchmark be reviewed? Although demand picking up from most importers of Nigeria’s oil, which should spell good news for our revenue accounts, we should be mindful that demand does not necessarily translate to sales at the headline futures contract price. The market is still recovering from the super-contango it faced a month ago. Contango defines the disconnect between physical barrel prices and the futures market. For example, Brent price at $35 does not mean Bonny Light, Qua Iboe crude our oil benchmark grades would sell at $35. If we recall, during the oil price war, Nigeria offered its oil for huge discounts and could not get buyers for their oil.

 

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OPINION: Should the Federal Government revise the 2020 budget benchmark to $20 a barrel?

 

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Another issue to consider is the cost of producing oil in Nigeria, which ranges around $22 per barrel. NNPC Group Managing Director, Mele Kyari, at a meeting organized by the Central Bank Of Nigeria, said Nigeria would be out of business, should the price of crude oil drops to as low as $22 per barrel.  If costs are at $22, how much revenue does Nigeria generate from its limited oil sales?

OPINION: Should the Federal Government revise the 2020 budget benchmark to $20 a barrel?

 

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In conclusion, given all these variables, I think it would be safe to pin the benchmark closer to the bottom of the market at $25, in anticipation of any adverse movements that might occur in supply and demand. This would be the right call for the Federal Government. The Bulls might be in control, but it would be advisable not to get over their heads as the pandemic can still likely throw cold water on the hopes of the price rally.

Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]

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    Columnists

    CBN vs Cryptocurrency; the gold rush, time for a change?

    Despite the CBN’s concern about Cryptocurrency in Nigeria, the cryptocurrency space has continued to roll out ingenious solutions to real-world problems.

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    Despite the Central Bank of Nigeria expressing its concern about Cryptocurrency in Nigeria, the cryptocurrency space has continued to roll out ingenious solutions to real-world problems. One of the most recent solutions is the advent of Non-Fungible Tokens (NFTs), a unit of data stored on a blockchain to certify that a digital asset is unique and non-interchangeable. It is an innovation that allows that an artist gets digitized title/ownership for their work.

    Based on a report from Coinbase yesterday, NFTs’ adoption is fast growing among Nigerian creatives, given that it provides a marketplace for creatives and art collectors across the globe. Although currently, the platform has recorded complaints from some artists whose artworks were minted without their consent, the platform’s potential market for African creatives is undeniably massive.

    Over time, the Nigerian creative industry has been quiet due to perennial problems such as inadequacy of patronage and piracy, which disincentivizes players in the space. This problem, coupled with the apparent low interest in other economic segments, led to Nigeria’s current overdependence on oil receipt. Most creative deals in the Nigerian NFT space are currently being consummated anonymously.

    Furthermore, Nigeria being the second largest market for cryptocurrencies globally over the last five years, with a market worth of trade totalling 60,215BTC, portends an interesting figure when the segments’ potential proceeds are considered.

    According to the National Bureau of Statistics, Nigeria has an unemployment rate of 33.3% as of Q4 2020. There is also the recent prohibition of local banks from facilitating cryptocurrency transactions. As an offshoot, the NFT’s ability to provide support to the economy in the area of rightly engaging creatives and other providers of ancillary services in the segment could be frustrated.

    There are also indications that Nigeria might be setting itself up to miss out on an otherwise potent foreign exchange source. In an era where oil receipt is becoming increasingly unreliable, avenues like this could provide a decent level of support given Nigerians’ tenacity and creativity, hence drawing more accretion to its external reserves.

    It is undeniable that Cryptocurrency poses some downside concerns in how it could easily aid some undesirable ventures, such as money laundering and terrorism financing. Nonetheless, we noted that Authority’s efforts should be geared more towards finding common ground where those concerns could be mitigated instead of shutting down the entire space.

    Noteworthy is that the buying and selling of cryptocurrencies have continued unabated since the last CBN’s directives were issued. Is it time to retract those directives and find a more effective way of combatting cryptocurrency concerns? Yes! However, we opine that as we advance, every move should be tailored to ensure Nigeria is not blindsided in this gold rush.

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    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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    Columnists

    SEC and the proliferation of unregistered investment platforms

    The recent move has generated diverse views from stakeholders with some critics classifying this action as irrational.

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    Reps raise alarm over N200 billion unclaimed dividends in 2020, the Capital market, Lamido Yuguda assumes duty as new DG of Security and Exchange Commission

    According to a circular issued by the Securities and Exchange Commission (SEC), it affirmed its knowledge of the existence of trading platforms that allow investors access to securities listed in other jurisdictions.

    The capital market regulator further reiterated the provisions of sections 67-70 of the Investments and Securities Act (ISA), 2007 and Rules 414 & 415 of the SEC Rules and Regulations which state that only foreign securities listed on any exchange registered in Nigeria may be issued, sold or offered for sale or subscription through approved channels to the Nigerian public.

    The announcement furthers SEC’s quest to strengthen investor protection, promote transparency in the operations of the Nigerian capital market and ensure all investment transactions are within the regulatory purview of the commission.

    READ: Nigeria’s public debt rises to N32.915 trillion as at December 2020

    Recently, the capital market regulator introduced a new requirement for the inclusion of the commission’s contact details in all prospectuses or offer documents issued to the general public in a bid to ascertain the genuineness of such securities. Besides, it is often found that the activities of illegal fund managers become prevalent during a financial or economic downturn, making the public susceptible to the juicy yet unsustainable returns promised by these managers.

    The recent move has generated diverse views from stakeholders with some critics classifying this action as irrational. They cited the impact of investing in foreign stocks on portfolio diversification and the role of Fintechs in driving financial inclusion among others. On the other hand, supporters of this action argued for the need to reduce the pressure on external reserves especially at a time when the green-back is needed to stimulate economic recovery.

    Also, that it helps to safeguard the country’s investing community. We recall that the recent policy by the CBN to close all accounts by Deposit Money Banks (DMBs) and Other Financial Institutions (OFIs) involved in dealing with cryptocurrencies received a lot of backlash from the public.

    READ: Why SEC banned investment technology platforms from offering foreign stocks to Nigerians

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    On this move, however, we opine that it is still within the legal purview of the SEC to discourage investments in foreign listed securities. Nonetheless, we are aware of the concept of globalization in commerce and thus, there might be a need for a rejig of the Investment and Securities Act 2007, and other related acts to capture current trends and developments in the investment globe.

    To avoid backlash going forward, we suggest more public education for clarity with regards to future policy decisions.

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    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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