OPEC deal may signal game changer for economy, equities

The Organisation of Petroleum Exporting Countries OPEC agreed last week to reduce collective production by 1.2 million barrels a day to 32.5 million and Russia (a non OPEC member) pledged a cut of 300,000, per day by January “if technically possible.”

Oil traded above $50 per barrel following the cartels first supply cuts in eight years and prompting predictions of a possible crude rally to $60 a barrel from Goldman Sachs Group Inc. and Morgan Stanley.

Naturally we are particularly concerned about what this deal means for OPEC member Nigeria.

Africa’s largest oil producer is exempted from the OPEC cuts meaning it can potentially earn badly needed dollar revenues from higher crude prices while growing production, a best of both worlds scenario.

Nigeria’s economy is forecast to contract by 1.7 percent this year, on the back of a badly hit and shrinking oil sector, while stocks have returned -11.79 percent year to date.

The non oil sector that makes up 91.81 percent of GDP eked out a 0.03 percent growth rate in the third quarter of 2016, while the oil sector made up of crude petroleum and Natural gas slumped by -22.01 percent.

A rebound in oil prices to $50 on average in Q1, 2017 should significantly boost growth and dollar accretion for Nigeria due to favourable base effects as oil prices averaged $39 per barrel in Q1, 2016 (see chart).

Nigerian production as at Oct. 2016 is also inching closer to the average production rate in Q1, 2016 (see Fig 2).

 

For equities which have been hit by a double whammy of slowing growth and dollar shortages, the OPEC deal should again be a positive.

When we plotted the NSE All Share Index (ASI) versus Brent crude there was very high co-relation meaning stocks will respond/rally higher to increasing oil prices in 2017.

Already our analysis from last week suggests stocks are oversold, using the Relative Strength Index (RSI), indicator.

Meanwhile the 3.2 percent ($775 million) increase in Central Bank’s gross dollar reserves in November to $24.7 2 billion is a positive indicator, although there is still a huge gap between the black market and official FX rate.

The above analysis is all is well and good however the one huge elephant in the room is the ability of the so called “Niger Delta Avengers” to disrupt oil production which will throw a monkey wrench into our projections.

The FG should move to quickly resolve ongoing agitations in the Delta so it can take advantage of the historic deal that may last up to a year.

OPEC will meet again on May 25 next year, at which point it intends to extend the cuts by another six months.

 

PATRICK ATUANYA