FXTM Research Analyst
Global Oil prices looked tired,
exhausted and ready for an early summer break during the second quarter of 2019
as global growth fears overshadowed supply disruptions and ongoing OPEC supply
cuts. At the time of writing, Oil prices remain shaky and vulnerable despite
OPEC+ latest decision to extend production cuts until March 2020.
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The crucial question is whether Oil
prices will ever recover and trade back towards the $70+ levels. That depends
less on geopolitical tensions in the Middle East and more on whether the US and
China can reach a trade deal, settling disputes over tariffs and opening the
door to continued global growth. In this case, it’s likely that Oil prices will
be injected with a renewed sense of confidence on the back of boosted global
growth expectations and demand for Oil. But what if the current circumstances
persist and the US-China trade disputes continue throughout the second half of
2019?
Taking each scenario one-by-one,
starting with the upside for Oil prices, Nigeria’s economy could benefit
considerably if a US-China trade deal is reached and global growth expectations
become brighter. The manufacturing sectors in the US and China are the
Oil-gobbling engines which drive demand for international Oil suppliers. China
is the world’s top crude Oil consumer, importing more than 50 percent of its
consumption, part of which comes from Nigeria. In the fourth quarter of 2018,
Nigeria exported N23.5 billion worth of crude Oil to China and remains a major
trading partner to the Asian giant. It’s likely that if China’s economy roars
back to life, Nigeria’s growth would see more long-term support, benefiting
foreign exchange reserves and the Naira.
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Although unlikely, if a trade deal were
to be announced early in the quarter, it’s possible the nation’s 2019 budget
would also see ample support from increased Oil revenues from China. This
argument doesn’t apply to the US which has considerably reduced its crude Oil
imports from Nigeria as it heads towards energy independence, relying instead
on domestic production to meet its own needs.
If you take the negative outlook on
Oil, it’s more likely the rise in Oil prices is a temporary result of supply
shortage fears and the prevalent trend in Q3 will be downward pressure from
concerns over a global recession. In this unfavorable scenario, the world’s two
largest economies do not reach a trade deal in the third quarter and aggregate
demand for Oil continues falling as it tracks economic weaknesses in China and
the US. As demand for Oil is whittled away, Nigeria’s foreign exchange reserves
may be negatively impacted, along with the Naira, the 2019 budget and most
importantly GDP growth. In terms of the national budget sheet, expenses like
the petrol subsidy may take the limelight as they drag on revenues,
overshadowing growth and threatening fiscal stability.
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There’s another factor we haven’t
talked about so far but it’s significant in terms of Oil market economics. Oil
sales are denominated in US Dollars. Recently, the currency has weakened
against its rivals, meaning that Oil is more affordable and possibly giving
traders an incentive to snap up contracts at current levels before they rise
further. If the Dollar bears have their way and the currency keeps declining,
Oil price benchmarks could see further support in the third quarter. The impact
of a weaker USD might not be as strong as a US-China trade deal, but it could
feed positively into Nigeria’s Oil revenues and go some way to counter possible
losses from ongoing global recession fears.
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To sum up, Nigeria’s foreign exchange
reserves, currency, growth and budget will face headwinds should trade disputes
persist. However, provided the USD keeps weakening there’s scope for support
from higher Oil prices based on bargain hunting. There’s always the possibility
that the US and China could decide on a trade deal, if this happens sooner than
later, Nigeria’s economy would benefit accordingly.
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