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Opinion: Oil prices will reach $50/barrel at the end of 2020

Oil prices can defy all odds going by these assumptions.

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Crude oil prices rebound ease investors’ concerns for Nigeria debt market, How substantial is compliance for the Oil market?

During the Nairametrics Economic Outlook webinar in May 2020, I took a buy option that Oil prices would hit the $50 mark by the end of 2020. It was a huge gamble to take but thinking through the question in a matter of seconds, my intuitions led me to the buy option.

Many will wonder what crystal ball I must have looked at when I decided to make a buy option at the webinar, well my take on that will be the crystal ball of my intuitions. The world order has many times seen the oil prices starting to rise more as the winter season starts getting to spring and many of the world’s production economies gear up for the peak of production and supply chain distribution during the summer.

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As summer tends to reach it’s peak towards the end of July into August, seemingly, oil prices take a slight a plunge to adjust for the effects of the last part of the summer holidays into fall where another sizeable round of production kicks off to meet the demands of the winter period which is filled with several celebratory holidays such as the American Thanksgiving, Christmas, the beginning of a new year and many of the Asian holiday celebrations such as the Chinese new year.

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That trend was similar at the end of 2019 and we were all preparing for the growth of the world economy which had been predicted to grow at 3.3%. With the start of a major outbreak of COVID-19 during the Chinese New Year in January, the disruption of the world economy began not many believed that the impact would be far more detrimental to the world in terms of production and supply chain management. The effect of this and many other incidents like the Saudi Arabia and Russia oil war sparked the biggest downward trend of Oil prices which at one time was predicted to hit rock bottom at below $10/barrel as it happened in the early 1980s.

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Two major challenges were greatly responsible for this downward spiral which I believe if responsibly managed in the second half of the year would lead oil prices heading in Northern direction and probably reaching my predicted price of at least $50/barrel by the end of the year.

1. The surge in the cases of COVID-19 hospitalization which disrupted the health care system and invariably the economic modalities of many countries.

2. United States of America’s reactions to the global health pandemic which led to not having a united front for dealing with the pandemic.

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READ ALSO: Digital technology, innovation aid €127m agriculture revenue 

As can be seen, the oil price averages have started moving the Northern direction again following its lowest average of $18/barrel in April, when the whole world was fully shut down in order to manage the health care crisis. In May, it averaged $29/barrel and it is looking at averaging out to $40/barrel at the end of June. This trend I believe will continue because more economies are beginning to open up slowly and the worlds production and supply chain management systems which for me are great determinant for the oil market are beginning to get back to a bit of normal.

However, there are a few boxes that must be checked in order to ensure that this trend will continue. For this, I have identified three boxes.

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1. How the world manages a potential next wave of an upsurge of COVID-19. I believe that Europe and Asia are the most prepared for this, with parts of North America (excluding the United States of America), South America and Africa too.

2. The increased opening of the world’s economies to trade and movement which would begin to become fairly functional towards the last parts of the third quarter of the year. However, I fear that the United States of America would lose out on this if they do not address the first box more adequately.

READ ALSO: COVID-19 could impoverish additional 5 million Nigerians – World Bank  

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3. The outcome of the world’s most-watched and anticipated democratic election. The November 3, Presidential elections.

The outcome of the November 3, US presidential elections, will play a huge and fundamental role in the way the outcomes of the first two boxes will play out. If there is a return of the incumbent, I see Europe, Asia and the rest of the world build their own reserves towards self-reliance and the continued economic wars would only lead to more chaos for the Oil markets.

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The increased numbers of COVID-19 challenges in America for box one could lead to more difficulties in opening economies to deal with America and the movement of Americans. Thereby increasing trade tensions and invariably leading to America flooding the supply of the Oil market to push prices down.

READ ALSO: How COVID-19 has changed Nigeria’s consumer goods & industrial markets –KPMG

A change in the realms of power to a new government, could lead to some form of stability between the traditional allies and even adversaries as the world would come together to manage the challenges of box one, leading increased and better managed economies being opened and invariably a more stable oil market to help manage the economic challenges of a health and safety issue thereby improving production and supply chain management systems and finally Oil markets driving the oil prices further North to reach the projected $50/barrel at the end of 2020.

Finally looking at my crystal ball of intuitions, I see better-managed world economy by the end of 2020 and oil process above the $50/barrel and a more restructured world economy in 2021 with the various applications of the NEW NORMAL.


Uade Ahime is a chartered accountant and corporate governance implementation expert. He has over 25 years working experience in oil and gas downstream and upstream, banking and consulting. Uade is also a member of the Nairametrics Editorial Board.

www.uadeahimie.com.ng

 

 

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Columnists

Will the recovery in the oil market be shortlived?

The report also revealed that OPEC crude oil production averaged 22.27 mbpd in June 2020.

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FG risks backlash as oil price crash encourages deregulation policy , Crude oil prices drop as investors assess demand recovery amid supply glut, Oil falls, approaches weekly decline as Covid-19 cases hit record

According to OPEC Monthly Oil Market Report for the month of June, Brent was up 25.8% m/m to average US$40.77/b. However, on a YTD basis, Brent was substantially lower at an average price of US$42.10/b (down 36.4%) in H1 2020 when compared with the average of US$66.17/b in H1 2019. The report also revealed that OPEC crude oil production averaged 22.27 mbpd in June 2020 (down 1.89 mbpd on a m/m basis) on the back of reduced output in Saudi Arabia, Iraq, Venezuela, UAE, and Kuwait. We believe the strong growth in brent prices in the month of June was supported by the recovery in global demand for crude following the gradual easing of COVID-19 lockdown measures by countries across the globe as well as OPEC+ production cuts which contributed to a gradual rebalancing of the global oil market.

Notably, the spread between ICE Brent and West Texas Intermediate futures continued to narrow in June for the second consecutive month. The spread narrowed by US$1.43 m/m to average US$2.46/b in June compared with US$3.88/b in May. According to OPEC, this was driven by an easing of supply overhang around Cushing, Oklahoma (a key refining center in U.S and the delivery point for WTI crude oil futures) and prospects of reduced U.S oil
production this year. Already, data from Baker Hughes indicated a sharp decline in drilling activity in the US, with the number of active oil and gas rigs falling for 16 consecutive weeks.

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At the end of June, the number of active oil and gas rigs in the US fell to an all-time low of 265 units, 73% below the level in 2019, according to data from Baker Hughes.

Looking ahead, we expect OPEC+ production cuts and the recovery in global demand for crude following the easing of lockdown measures to remain positive for oil prices in the short term. We however expect the rally in oil prices to be capped by subdued growth in the global economy which would limit the pace of recovery in oil demand. In our view, the biggest downside risk to the rally in the oil market remains the growing number of new infections across the globe particularly in the U.S, which could prompt a second wave of lockdown and halt the recovery in global demand for crude.

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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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Analysis: CBN bans maize importers from accessing FX

CBN noted that the ban was necessitated in order to protect local production of maize.

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Nestle partners USAID to improve quality of Nigerian grain 

Yesterday, the Central Bank of Nigeria (CBN) released a circular banning importers of maize from accessing forex from the apex bank. This implies importers would have to rely on supply from the parallel market to carry out their transactions. According to the circular, the CBN noted that the ban was necessitated in order to protect local production of maize, stimulate rapid economic recovery, safeguard rural livelihoods and increase job creation.

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Recall that in May 2015, the CBN announced the ban on importers of 41 items from accessing FX from official sources including items such as rice, cement, palm products etc. Since then, the CBN has increased the list by adding items like dairy products, textile, fertilizers etc. Indeed, the CBN governor, Godwin Emefiele had in 2019 guided that the list would be extended to cover some other items as the President Buhari-led administration aims to drive Nigeria towards food sufficiency. However, critics of the policy have always highlighted that the CBN only makes such moves in times of scarce FX rather than a deliberate attempt to stimulate food production.

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The Naira has come under severe pressure in recent months following the hit to global crude oil prices and demand. This has forced the CBN to devalue the currency and indications point to further devaluations, evidenced in the quotations from the FX futures market with the 1-year N/US$ quotation at N410.60 (as at 13 Jul 2020).

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According to data from the United States Department of Agriculture (USDA), Nigeria’s corn production for the 2019/2020 planting and market season stood at 10.5 MMT while consumption stood at 10.7 MMT. Nigeria imported 0.4 MMT of corn in 2019/2020 market season according to the data from USDA. Considering the low quantum of imports that would be disrupted relative to market size, we don’t expect any major shock to prices, though the recent decline in maize production creates some concern.

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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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E-payments ecosystem continues to show promise

We expect the e-payments industry to continue to record significant growth even beyond the pandemic.

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E-payment

The payments industry in Nigeria continues to demonstrate its promising growth with the recent data from the Nigeria Inter-Bank Settlement System (NIBSS) showing solid growth across the various e-payments mechanisms in the first 5 months of 2020 (January – May 2020). NIBSS Instant Payment (NIP) transactions recorded a healthy 17.3% y/y and 47.7% y/y growth in transaction value and volume to N48.7tn and 615.3m respectively. For POS transactions, total transaction value and volume grew 44.0% y/y and 50.0% y/y respectively to N1.6tn and 228.9m respectively. The most impressive growth was recorded in Mobile transactions category where transaction volume and value grew 567.5% y/y and 364.7% y/y to 41.1m and N853.7bn respectively.

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The sustained growth in e-payments transaction volume and value in Nigeria evidences increased adoption of technology in payments and cash transfers by the Nigerian populace. This is driven by increasing internet & mobile penetration as well as investment by banks and other payment-based fintechs investment in payment technology infrastructure. Furthermore, we note that the Central Bank of Nigeria (CBN) announced reduction to the fees payable on mobile and internet payments/transfers. We think this has had a mild impact on increased usage of these platforms. In addition, with the onset of the pandemic the use of physical cash in settling payments and bills has been discouraged. Thus, we think e-payments benefitted from significantly from this.

Going forward, we expect the e-payments industry to continue to record significant growth even beyond the pandemic as many of the new methods of transacting will be sustained in our view. In our opinion, the e-payments sector of the fintech ecosystem is expected to serve as the growth frontier of the new decade in Nigeria as highlighted in our 2020 Nigeria Fintech Sector Report (See CSL_Nigeria’s Fintech Industry 2020; Growth Frontier of the New Decade). Consequently, we expect banks and payment fintechs like Interswitch & Paga to benefit significantly from the e-payments revolution.

READ MORE: Nigeria’s fintech industry 2020: The growth frontier of the new decade

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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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