Being an Analyst Note issued by Proshare Research on July 27^th, 2022

Sustained Bullish Oil Market Sentiments Awakens Analysts Interest

Oil prices have retained their bullish run for the week, driven by a sustained rise in market fundamentals. Despite concerns about weaker demand in the US and fear of interest rate hikes, lower inventories data from the American Petroleum Institute (API) suggests a long bullish position evidenced in the current increase in market backwardation. 

This was supported by fears of a cut in natural gas supply to Europe, strengthening demand prospects for middle distillates, and a possible switch to diesel in the winter months. On the supply side, available data suggest that OPEC+ compliance level dropped to a record low in June while Gazprom has further lowered gas supply through the Nord Stream 1, reinforcing the fear of supply disruptions for oil and gas. Strong uptick fundamentals reflect in the market ignoring the return of Libyan oil. Analysts expect a spike in crude oil prices at an average of $105 per barrel for the year. 

FAAC Distributes N802.4bn for June, and N4.12trn in the first half of 2022 

The Federation Account Allocation Committee (FAAC) distributed a total of N802.41bn to the three arms of government for the month of June. Of this amount, the Federal Government received N321.86 bn, the State Governments, N245.42 bn; while Local Governments got N182.3bn. Proshare Analysts note that the recent FAAC payment for June brings the total FAAC allocation for the first half of the year to N4.12trn, which is about +5% higher than the total FAAC allocation made over the corresponding period of last year (see chart 1 below).

Charts 1: FAAC Allocations 2021 & 2022 (N'trn)

 Analysts Differ from  Nigeria’s IMF Growth Forecast of 3.4% in 2022

The IMF in its recently released World Economic Outlook July 2022, retained Nigeria’s growth for 2022 at +3.4%. The Bretton Woods organization had reduced the global growth projection by 0.4% from its earlier forecast in April (+3.6%) to +3.2%. Emerging Market and Developing Economies also got 0.2% d from +3.8% as given in April 2022 to +3.6%. Proshare Analysts note that with growth projected at +3.4% and annual population growth rate of +2.5%, the country’s per capita GDP is constrained to a +1% growth. The FG had also downwardly reviewed its forecast for 2022 from +4.2% to +3.55% reflecting rising inflation, which is expected to slow down consumer spending and Investment, as well as oil theft and vandalism which constrain general government revenue.

Economists Expect Global Wheat Prices to Depend on Russia

Ukraine and Russia signed a deal on Friday to allow the export of grains from Ukraine to go through the black sea. The agreement brokered by Turkey and the United Nations allows Ukraine to export wheat stored in silos which had been a problem since Russia invaded the country. The export cuts experienced from this invasion pushed prices of wheat up and affected an estimated 180 million people in North Africa, the middle east, and Asia who depend on the grain as a staple foodstuff alongside other regions.

 In less than 24 hours after signing the deal, Russia launched missiles at the Ukrainian port in Odesa claiming to target military infrastructures. Ukrainian authorities claim this attack, targeted at ports of export could force them into halting the process as privately run companies would prefer to avoid the risks posed to their vessels as marine insurance sources argue that a price cover cannot be calculated now. 

While wheat prices have been on a decline for weeks owing to relief coming from the United States' export of wheat, prices turned upwards in the last trading session on the back of high temperatures and drought affecting some western states in the country (See Chart 2 below).

Chart 2: Wheat Price Movement ($/bu)

Equity Winter Persists as Analysts See No End in Sight to Rate Hikes

Amid intense sell pressure, the Nigeria Equity Market experienced a bearish trend for the second consecutive day as the NGX All-Share Index dipped by 1.86% to close at 50,442.37 basis points as against 1.11% loss recorded to close at 51,400.53 basis points at the end of the previous trading session. In Naira terms, the NGX Market CAP records N516.69bn loss. Total volume traded advanced by +57.98% to close at 98.85m, valued at N2.51bn and traded in 4,314 deals. Flourmill was the most traded stock by volume with 19.32m units traded while Flourmill was also the most traded stock by value which is put at N618.05m. 

Analysts expect the bearish season to continue in the Nigerian stock market due to mounting global and domestic uncertainties. The likely increases in the United States and Euro zone interest rates and the lingering war between Russia and Ukraine will raises the threats of capital outflow and erosion of funds from the equity markets, albeit there may be some adjustments as company release their earnings. 

Bond Market Retains Bullish Slant as Analysts Note Improved Market Liquidity 

Activity in the bond market improved yesterday with few selloffs and cherry-picking by investors across all tenors. However, the overall average benchmark yields stayed flat at 12.20. The incessant quietness in the market reveals depressed liquidity which should wear off following the inflow of the June FAAC allocation, analysts believe that should buoy some buying interest along the short tenor although investors’ attention will be diverted towards the NTB primary auction today (see table 1 below).

Table 1: FGN Bonds Market 

Bitcoin Price Movement; Analysts Foresee A Short Road Down

Bitcoin remained in a bearish zone after falling to US$20,700. The coin previously consolidated at US$22,000, which is the present resistance point, and a support level of US$20,620. Bitcoin gained +1.22% in the last 24 hours. Other major coins traded mixed, with Cardano falling by -0.47% and Ethereum rising +2.99% from US$1.362.95 to US$1,463.16. Analysts noted that if the bearish trend continues, Bitcoin might see further decline at the US$ 20,600 support level and a price reversal at the US$19,800 level (see Chart 3 below).

Chart 3: Bitcoin Indicators