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Falling Oil prices: Nigeria’s Halloween reality

The majority of Nigerian oil buyers are in Europe and with imminent lockdowns, could face a potential scenario where oil revenue would decline.

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Last week, Brent oil suffered a 10.3% loss and was down 8.5% in October as COVID-19 cases keep soaring. Demand is getting crushed and consumption would soon follow, as major countries in Europe begin lockdown. The majority of Nigerian oil buyers are in Europe and with imminent lockdowns, we might face a potential scenario where oil revenue would decline.

With oil demand in Europe being affected, global oil inventories are falling at a rate of around 2 million barrels a day in September and October and that decline will probably continue, according to Mike Muller, the Head of Asia for Vitol Group.

“We are seeing demand destruction unexpectedly from these lockdown measures – hundreds of thousands of barrels-per-day-equivalent for Europe alone,” he said. “But the bigger, overriding picture is still that the world is in a stock-drawing mode.”

The forthcoming United States election poses another threat to Nigeria’s oil fortunes. A win for Trump might leave things unchanged, although the ever-growing presence of the shale industry which currently suffers from poor profit margins and capital expenditure could affect Nigeria.

On the other hand, a win for Joe Biden might signal the decline of the American Oil industry. Although, this might be offset by the return of Iranian oil, as Joe Biden’s diplomatic relations with Iran might remove sanctions imposed by Donald Trump.

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Additionally, the United States set another Covid-19 record last week Friday, as they recorded more than 100,000 cases. These statistics bring the total number of coronavirus cases in the United States (one of the largest consumers of oil) to 9 million cases.

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Speaking of large consumers, Nigeria has hope in the improvement of demand from China and one of Nigeria’s frequent oil buyers, India. There have been reports that both nations have had economic activity pick up and this might be the only bullish signal for oil.

In contrast, the oil bears have all the necessary impetus to bring prices down. After prices had already hit the June low, there is a possibility that prices might target another support level. The catalysts to drive this include the buildup up of Crude draw in the U.S (one of the largest oil producers), as reported by the E.I.A last week.

Secondly, the imminent lockdowns in Europe and the rapid rise of coronavirus cases which signal the destruction of demand would give the bears more drive. In addition, the bears will be motivated by the uncertainty of the outcomes of the United States election, which signals a delay in the stimulus bill (which has provided oil markets support for the past few months).

Nigeria would need her allies in OPEC+ to push forward their meeting, originally slated for the ending of November/start of December. The bears have all the time to cause carnage in the oil markets and OPEC+ cannot afford to watch prices run down before the meeting.

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Bottomline

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The return of Libyan oil, which reports suggest is building momentum, poses another headache for Oil bulls. Libya is an OPEC+ member and home to Africa’s largest crude reserves. But it’s exempt from the group’s supply cuts initiated in May as the coronavirus pandemic stifled economies caused oil prices to tank.

With potential shortages in oil revenue coming, FX liquidity would remain as it is. Scary as it sounds, this might go on till 2021, as all the vaccine talk seems to have gone out the window. It just seems that Nigeria and Nigerians might be in for a longer Halloween.

Dapo-Thomas Opeoluwa is a Global Markets analyst and an Energy trader. He is currently an MSc. Student in International Business, Banking and Finance at the University of Dundee and 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 the financial marketplace. You may contact him via his email- [email protected]

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Commodities

Vaccine, Backwardation and OPEC+: Hope for oil?

There is a renewed hope for oil prices as backwardation in the oil markets and OPEC+ production cuts prop up the markets despite COVID-19 cases.

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Saudi, Russia agree to cut oil by 20 million barrel, Further oil production cut required to keep oil price above $40 in 2020 , OPEC + deal to boost Nigeria’s earnings by $2.8 Billion

Oil prices finished higher on Wednesday, with help attached to progress made on vaccines for COVID-19.

There is also renewed hope for oil prices as backwardation in the oil markets and OPEC+ production cuts prop up the markets despite the coronavirus cases that keep rising worldwide.

Brent oil rose to as high as $48.90. Also, West Texas Intermediate rose as high as $46.20 a barrel on the New York Mercantile Exchange.

Optimism around vaccine developments continues to buoy sentiment, despite the current lockdowns that we are seeing across Europe, and with the numbers of U.S. COVID-19 cases now passing the 12 million mark,” said Warren Patterson, Head of Commodities Strategy at ING.

READ: Mike Adenuga: The journey from petty trade to Conoil and Glo

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This rise in Oil, moved prices to their highest price since March, after AstraZeneca also declared a great update to the advancement of its COVID-19 vaccine.

The drugmaker in a joint effort with the University of Oxford – said its vaccine was 70% powerful at preventing COVID-19 in a preliminary trial of about 20,000 volunteers.

AstraZeneca’s vaccine progress denotes the third sure vaccine from organizations after Moderna inc., Pfizer and BioNTech, are hurrying to put up a reasonable drug for sale to the public.

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In any case, possibilities for an immunization are needed ahead of a potential third wave of the COVID-19 virus. The US recorded more COVID-19 cases this week as indicated by the COVID Tracking Project.

READ: Investment bank with over $35 billion assets plans investing in bitcoin

Backwardation

Another reason why prices are rising is because of what traders call Backwardation. Oil prices are historically bullish when backwardation occurs in the markets. It is a situation where traders no longer have an incentive to store oil and sell it later.

Right now, they are selling it because prices could be lower in the future. The demand from Asia also makes the market feel balanced now.

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When the current price of oil is higher than prices trading in the futures market, traders sell live barrels and buy oil futures contracts, which leads to a convergence of both prices.

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This can occur because of a higher demand for oil than the contract in the futures market. Traders use backwardation to make a profit, by selling short at the current price and buy at the lower futures price.

OPEC+

To bring support to prices, OPEC+ and partners including Russia will expand the span of their production cuts when they meet soon, to balance frail demand over the winter months.

Recall, OPEC+ cut production in April, as oil demand imploded during lockdowns. Though there were talks about returning about 2m barrels a day of production to the market in January 2021, there is a strong possibility that they will postpone the return of these barrels.

READ: CBN launches Private Sector-led Accelerated Agriculture Development Scheme

Goldman said it expects OPEC+ to delay its planned 2 million bpd January production ramp-up for three months, citing coordinated measures to curtail output as “the optimal near-term action,” according to their experts.

There was a lot of purchasing demand, which has pushed prices to this level. This was overshadowed, as there is a worry over worldwide demand, as COVID-19 flare-up proceed far and wide. Prices were likewise increased by information demonstrating a bounce back in China, Japan and other Asian buyers.

The gathering, known as OPEC+, has been cutting production by about 7.7 million barrels every day (bpd), with compliance seen at 96% in October, and had wanted to maintain cuts by 2 million bpd from January.

OPEC+ is set to hold a meeting on Tuesday that could prescribe changes to production cuts when all the members meet on Nov. 30 and Dec. 1.

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READ: Gold prices under pressure, U.S dollar ticks up

There is no denying that the oil market is fully in the hands of OPEC+,” said Bjarne Schieldrop.

The organisation is the only reason why oil prices today are not $20 a barrel. As such, their upcoming meeting on Nov 30-Dec 1 is hugely important.

Nigeria, however, wants to increase production and their quota as the revenue of the country dwindles with foreign currencies getting scarcer.

The more production means Nigeria would be able to make more oil sales. Hopefully, the meeting would give more room for Nigeria to increase its quota.

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Commodities

Oil prices up, energy demand up

Brent oil futures gained 0.51% to trade at $48.86/barrel and the West Texas Intermediate futures ticked up by 0.46% to trade at $45.92/barrel.

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Five oil majors reduce value of their assets by $50 billion in Q2

Crude oil prices continued their bullish trend at London’s trading session on Thursday morning. Oil traders are going long, as recent data from the world’s largest economy reveals a surprise draw in U.S. crude oil stockpiles, coupled with high buying interest from Asia, strengthened the resolve of oil traders to go long.

READ: FG says recent petrol price increase linked to Pfizer Covid-19 vaccine success

  • At about 6.15 GMT, Brent oil futures gained 0.51% to $48.86/barrel.
  • West Texas Intermediate futures ticked up by 0.46% to trade at $45.92/barrel.
  • Data from the EIA revealed a plunge of 754,000 barrels for the week to November 20.
  • However, Gasoline stocks gained 2.2 million barrels in the week to 230.2 million barrels, the Energy Information Administration said.

READ: NNPC, only Nigerian company to cut losses by N800 billion in one financial year – GMD

What they are saying

In an explanatory note to Nairametrics, Stephen Innes, Chief Global Market Strategist at Axi, gave deep insights on key fundamentals pushing oil prices up amid a COVID-19 era.

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“Oil traded higher on Wednesday in a very tight range until the rally midday in New York. WTI attempted a clean push through $46, and Brent printed through $49 before retracing some.

READ: Nigeria’s 5,000 BPD refinery will produce 271 million liters of petrol every year

The inventory numbers released earlier in the NY session helped push the market higher, with the EIA figures more bullish than the previous days’ API estimates and bullish to consensus.”

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He also elaborated on the buying interest seen lately from the Asian economic juggernauts, China and India, which is giving oil bulls enough gas in roaring hard, “Asia’s unquenching demand remains for all to see. Chinese and Indian buying interest continues with tenders issued for both spot and term cargoes, directly responsible for increased demand and reflected in the Brent curve, which has moved to a mild backwardation this week.”

READ: How Cash flow, Liquidity, and Leverage impacts your financial plans

Bottom line

The colossal moves prevailing in the crude oil market over the past two days echo optimism amid positive vaccine development. The flattening of the curve suggests that a positive surprise on current demand is also being reflected.

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Commodities

Gold prices tumble, hit lowest level since July

Gold bulls are presently nursing their wounds amid the sharp drop seen lately in gold prices

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Gold bulls are presently nursing their wounds amid the sharp drop seen lately in gold prices. At Tuesday’s trading session, the yellow metal dropped through the $1,800 mark for the first time since July.

What we know: At the time of writing, Gold futures were down 0.16% to trade at $1,801.75/ounce after losing over 35 dollars on Tuesday alone amid a strong appetite for risk among global investors on COVID-19 vaccine turned them away from safe-haven assets.

READ: Nigerian billionaire, Benedict Peters Plans to mine Platinium in Zimbabwe

Adding to the current wave of optimism is the official approval given to the U.S. presidential transition process given by Emily Murphy, director of the General Services Administration.

In an explanatory note to Nairametrics, Stephen Innes Chief Global Market Strategist at Axi spoke on the macros giving gold bears such resolve in taking the price bandwagon down to its lowest level since July;

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READ: Investors pump N7 billions into New Gold ETF

“The improved expectation for material vaccine deployment in 2021 has likely closed the door on the gold upside. And given the heft of ETF positions, especially the massive accumulation since the beginning of this year, there is definite scope for a deluge of ETF unwinds. So, look for a massive clear out again on a break of the psychological $1800.

“Gold fell and hit its lowest level since July. It is much of the same – transfer of ownership continues into stable allocation – with no huge clips dealing with Asian banks providing the offer during Shanghai Gold Exchange hours.

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READ: Why Nigerians Should Invest in Foreign Exchange Traded Funds

“Gold rout continues as investors embrace vaccine news. The break of USD1,800/oz support may take prices near USD1,750/oz as surging investor optimism due to promising COVID-19 vaccines has undermined gold and silver.”

What to expect: The precious metal will continue to be under immense pressure from the gold bears taking into account the commanding macro theme related to a vaccine recovery and the reduced risks associated with central bank debt monetization or the pursuit of quasi-modern monetary theory.

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