Possible headwinds for the Naira – Oil Oversupply

Some analysts are predicting lower oil prices of around $42 per barrel due to looming oversupply. Oh how fickle the optimism of global economists and oil markets.

It is often said that market prices are not set by fundamentals but by fear and greed.

The oil market is right now being stalked by fear.

A couple of weeks ago the optimism abounded.

Announcements of OPEC supply cuts meant that prices immediately rose as buyers thought that a restricted supply was necessary to produce a sellers market where prices would rise.

This has been good news for Nigeria in particular.

The price optimism allowed the CBN to pump dollars into the market in the certain knowledge that the new oil price (predicted then by some to rise over $60 per barrel), would give them the dollar reserves required to sure up the Naira.

Interestingly, that is what they are doing. They are suring up the Naira though it has not recovered on its own like many other petrodollar currencies.

I admit this is partly to do with our archaic method of releasing dollars into the market and therefore ensuring car dealerships around the CBN are kept in business through the opportunities for corruption that are created.

However, the fact that despite a return to “new normal” oil pricing, the Naira requires constant large intervention to maintain an equilibrium is concerning.

This game changes if the price per barrel drops to $42.

Even Nigerian sleeping oil fields waking and coming on line, as per recent news, will not offset a lower price.

Reasons for lower predictions are varied.

But primarily they include evidence of US production rising (of course the US is free to flood the market as they are not an OPEC producer), Chinese consumption lower than predicted, and a contained wave of production that is set to be released once any OPEC production control agreement either fails or is halted.

Any of these factors will drop the oil price dramatically.

Having had their pockets and egos severely dented by the recent price drops, the Arabs’ will to kill off US production by flooding the market and dropping the price (the cause of low prices supported by most analysts) has to be questioned.

All this means that Emefiele’s confidence in his ammunition stockpile to defend the Naira looks misplaced.

Not only are the downward pressures still evident. Any waiver to the downside in Oil price will leave his strategy in tatters.

It is an opportunists strategy, if the market moves away from him he will left high and dry. As will the Naira.

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