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Analysts Reviewed the Resurgence of Fuel Queues, MPC Rate Hikes, and the New Crude Drilling in the North

Nov 23, 2022   •   by TheAnalyst, Proshare Research   •   Source: Proshare   •   eye-icon 163 views

Being an Analyst Note issued by Proshare Research on November 23rd, 2022

 

Fuel Queues Resurface on Market Distortions

Fuel queues resurfaced in Lagos and Ogun as motorists scramble for petrol across filling stations while commuters are stranded at vehicle parks. Analysts observed that the situation resulted from many distortions in the downstream oil market. Marketers have clearly expressed this under different unions. The Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) believes the rampant extortion, intimidation, and violent attacks by hoodlums on its members are halting the distribution process. 

 

Depots and Petroleum Products Marketers Association of Nigeria (DAPPMAN) attributed the fuel scarcity to marketers' displeasure at the 0.5% tax on the gross turnover of marketing companies and logistics challenges, including bad roads and high transport costs. The   Independent Petroleum Marketers Association of Nigeria (IPMAN) blamed the scarcity on distribution glitches at the depots occasioned by high and dollar-related charges. Although analysts expect significant reductions in charges on oil marketing companies to ease the persistent fuel scarcity, they fault the low margins claim by marketers, noting that most 2022 Q2 and Q3 earnings of downstream oil companies saw significant improvement year-on-year.

 

Analysts Consider the Implications of MPC's Fourth Consecutive Rate Hike 

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to raise the Monetary Policy Rate (MPR) by 100bp from 15.5% to 16.5% while leaving holding all other policy parameters. The Monetary Policy Rate, the reference rate that guides, has been raised by 500bp since May. The MPC considered the persistence of elevated inflation, the expected pre-election spending, and spending associated with the festive season.

 

Analysts, however, believe the decision would reduce the growth forecast for Q4 2022, with higher lending costs threatening private-sector productivity, especially in interest rate-sensitive sectors. Along with the planned ad-valorem tax on sweetened beverage products, the elevated interest rate regime could force many businesses in that sector to downsize.

 

Analysts say this could affect unemployment and poverty levels in the country.  On the flip side, Analysts say commercial banks benefit from the higher interest rate decision as they are expected to adjust lending rates to reflect the new interest rate while also grossing up for CRR debits. The banks being institutional investors, would also increase their margins by taking advantage of the high-yield environment. Retail investors are expected to undertake further portfolio adjustments, which could spur another round of selloffs in the equity market. The Monetary Policy Committee's decision suggests that incoming inflation numbers would be the primary determinant of the size of future rate hikes.

 

Chart 1:

 

Crude Oil Drilling in the North Attracts a Second Look

President Muhammadu Buhari on Tuesday inaugurated the Kolmani Integrated Development Project and flagged off crude drilling on Oil Prospecting Licence 809 and 810 at Kolmani River II Oil Field between Bauchi and Gombe States. With limited information on the category of oil reserve in the Kolmani field, Analysts believe the field has probable reserves given its licence category. A probable oil reserve has over 50% likelihood of commercial recovery of oil, while a proven reserve has over 90% likelihood of commercial recovery. Though the project's cost is expected to be undertaken by Sterling Global Oil, NNPC Ltd, and New Nigeria Development Company (NNDC) Ltd, analysts raised concerns about the precedence of the NNDC. The NNDP, owned by the 19 northern states, has had a history of not following processes in licence renewal. Such a case could undermine regulatory actions and deter other investors. Analysts expect the States involved to get the 13% derivation once the reserve is proven and full-scale production in commercial quantity commences from the field. 

 

Europe Runs Into a Food Problem as Fertilizer Scarcity Bites Harder

Higher energy prices have affected European industrial activity, affecting the fertilizer industry as fertilizer makers are also shutting down their plants. Fertilizer imports have been reduced because the biggest suppliers of fertilizers for Europe were Russia and Belarus; both currently under sanctions have retaliated by cutting exports to Europe even though European leaders insist that fertilizer exports were not sanctioned.

 

Russia accounts for 45% of the global ammonia nitrate supply, 18% of potash-potassium-containing salts, and 14% of phosphate exports. Belarus is also a significant exporter of fertilizer, especially potash. The EU has started looking for alternatives to fertilizer supply as they are plunged into a situation with no immediate solution to the problem. With lower imports comes a higher price for fertilizer, making life more difficult for the farmer, which would mean higher production costs with lesser crops produced, resulting in higher food prices running into Q1 2023. 

 

Bond Market Remains Bearish  in Response to Rising MPR 

In expectation of the MPR outcome, the FGN bond market traded bearish yesterday. The selloffs at the short and mid-tenor broke off the bullish sentiment recorded since last week, bringing the average benchmark yield up by 21bps to 14.59. Analysts expect bond prices to continue to drop as inflation risks and real return affect investors'' interest (see table 1 below). 

 

Table 1: 

Table

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The Bulls Dominate The Equity Market

The Nigeria Equity Market records its 3rd consecutive positive trade session as the Market capitalization gained N145bn. The NGX All-Share index advanced by 0.60% to close at 44,929.33 index points against 44,662.96 at the end of the trading session. Analysts expect the 500bps hike in MPR in 2022 to halt the momentum in the equity market. Sectoral performance was broadly positive as fifteen (15) NGX sector indexes closed northward, one (1) closed southward, and two (2) closed flat. The NGXBVI index advanced by 2.29% to top the gainers' chart, and the NGXSOVBND Index declined by 0.29%. The Year – to – Date stands at 5.18%, with the Month-on-Month gain standing at +2.5% (see chart 2 below). 

 

Chart 2: 

 

Crypto Coins in Bull Walk Despite FTX Crisis

After facing massive dips for weeks, the crypto market is back to bull this morning. The market continued to feel the effects of extensive crisis due to the collapse of FTX, which caused doubt and panic among investors, particularly the novices. Bitcoin recovered from yesterday's loss with a 4% increase, bouncing back to US$16,600, compared to The global cryptocurrency market cap yesterday was up around US$820bn, but there seems to be a rise this morning to US$842bn.

 

Argentina's defeat to Saudi Arabia at the FIFA World Cup in Qatar yesterday sent a global shock wave to the crypto sector. The Argentine Football Association's crypto fan token, ARG, dropped significantly by 25%. The token was at US$7.50 before the match and fell to US$5.39 after the defeat as fans sold off their tokens. Saudi's national team and fans rejoiced in their unexpected victory yesterday as The Saudis' nonfungible token (NFT) price moved from 0.196 ETH to 0.3 ETH following the success with a 50% increase. Analysts believed the increase and decrease in the prices are impacted by the field scores and teams' performance (see chart 3 below).

 

Chart 3: 

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