Rise in Crude Oil Production Is a Double Edged Sword for Nigerian Equities 1

Crude oil production rise

Nigerian equities have reaped tremendous benefits from the new forex window that has been opened recently, as we had seen in the previous article.

However, a major source of positivity for stocks of the country are the recent developments in crude oil production. Shipments of the commodity form over 90% of all exports from the country in terms of value. Hence, the country’s fortunes are closely tied with the commodity.

From June 7, Royal Dutch Shell plc (RDS-A) lifted force majeure on crude oil shipments from Nigeria’s Forcados terminal. This led to all terminals of one of the countries oil giants finally being functional for the first time in 16 months.

Force majeure had been declared on Forcados after Niger Delta Avengers had attacked the export terminal multiple times last year.

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With the terminal coming back online, Nigeria’s crude oil production has the chance to climb back towards the 2 million barrels a day level.

Double-edged sword?

Given the dependency of Nigeria on crude oil exports, a rise in production should be considered a positive development, but there’s a caveat.

Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members have pledged to reduce crude oil production by 1.8 million barrels per day in order to bolster prices. The initial agreement on the cuts had been reached last year and was to run until June this year, but has been extended for nine more months until March 2018.

Nigeria was one of the countries which was exempted from the cuts. Bloomberg noted that the reopening of exports from Forcados will “amount to about 20 percent of the supply OPEC has pledged to cut from world markets.”

This increased supply can potentially depress the rise in crude oil prices – the primary aim of the production cut – and hurt Nigeria itself in the process as its export revenues will experience a cap if prices remain relatively low.

At this juncture, though, both the government and investors seem pleased about the country moving towards full capacity – a situation it has not been in for over a year.

Coupled with the improving macroeconomic picture outlined in the previous article and hopes of continued reforms, Nigerian equities look poised for a sustained bull run.

But before ploughing into stocks from the country, it’s important to know the facets which pose a threat to a further rise. Let’s look at one of the biggest factors in the next article.

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