Focus for the week: HY’24 Nigeria Oil & Gas Outlook: Hanging on a fragile balance

Global economic picture remains mixed but shows resilience.

Despite the pressures on the global economy from high interest rates and geopolitical tensions, the economy has shown resilience. This is evident with the purchasing managers’ index (PMIs) remaining in expansionary territory and the GDP of major economies maintaining growth. This resilience is largely due to strategic maneuvering on the fiscal side, which has helped prevent the economy from overheating. As a result, given the resilient state of the global economy, oil demand rose by 2.0% y/y, driven by increased consumption from major economies including the US (+1.0%), China (+4.6%), and India (+5.6%).

Supply

Amidst sustained cuts from OPEC members, global oil supply expanded by 1.5% y/y. This increase was driven primarily by output growth from the United States and other non-OPEC producers. However, it’s important to note that demand growth outpaced supply growth to a slight degree in H1, as OPEC’s production cuts limited the overall expansion of global output. This interplay between supply and demand resulted in a relatively balanced market in the first half of the year. Interestingly, despite a balanced market, prices remained highly volatile, reaching a peak of $91.2/bbl in April, and averaging $84.7/bbl in H1, up 7.0% y/y.

IOCs maintain a risk-off stance towards the Nigerian oil and gas sector.

Oil production remained range-bound in H1’24, declining by 12% between January and June, as maintenance activities at major terminals curtailed output growth. However, on a y/y basis, oil output inched up 5% y/y to 1.27mb/d in June. Meanwhile, the country’s production output consistently fell short of OPEC quotas in the first half of the year, and we envisage that we may be unable to meet these agreed quotas by year-end due to longstanding issues including under-investments and vandalism. We however highlight that the government has made strides to turn around the sector, however, IOCs who have the financial might to uptake investments have remained lukewarm.

Improved pricing dynamics to drive earnings growth for downstream players

For the downstream segment, just as we had predicted, margins have remained stable for the major oil marketers, as pricing dynamics have improved. However, the sector remains partially deregulated, as foreign exchange fluctuations are making it difficult for the government to completely deregulate. Looking into H2’24, we see a strong case for further ease of price controls, given the relative stability of the currency, and potential supply from the Dangote refinery. Earlier in the year, the refinery began production of diesel and jet fuel, and more recently gas oils. PMS is expected to follow suit in the coming months. The fair value of PMS in our view ranges within ₦900-₦1050.

What shaped the past week? 

Equities: This week, the local market largely traded in a mildly bearish manner but was able to recover from last week’s 35bps loss, largely due to the telecoms sector, gaining 0.87% w/w to settle at 100,539.40 ppts. Leading sectoral losses was the Insurance sector (-4.86% w/w), driven by sell-side action in LINKASSURE (-13.13% w/w) and VERITASKAP (-11.67% w/w). This was followed by marginal losses in Banking (-0.05% w/w), Consumer Good (-0.20% w/w), and Oil & Gas (-0.05% w/w). On the flip side, only the Industrial Goods sector (0.08% w/w) recorded a gain this week.

Fixed Income: This week, the CBN held an OMO auction with a total of ₦150 billion offered across the 97-day paper, 188-day paper, and 363-day paper. However, at the end of the auction, zero subscriptions were recorded across the three tenors. This was due to constrained system liquidity as banks continued to source funding at the SLF window. This saw OPR rate stay elevated above the 30% mark. This also led to tepid trading activities at the capital markets. At the of the week, mild changes were seen on the 182-Day bill (+10bps), 364-Day bill (-1bp), 2-year note (+3bps), 3-year note (+1bp), and 20-year note (+6bps)

Currency: At the NAFEM, the Naira appreciated by ₦54.13 w/w to close at ₦1509.67 per dollar.

Domestic Economy: Inflation rose faster than anticipated to 34.19% y/y in June 2024 (May’24: 33.95% y/y). This outturn was 19bps above Bloomberg consensus estimate of 34.00% y/y (Vetiva: 33.97% y/y). We attribute the surprise outturn to the brief disruptive impact of union agitations on the supply of power and PMS in the closing weeks of May, and the elevated demand for food items during the Sallah celebrations in June. Due to the surprise outturn in inflation, we believe the apex bank may deliver a 100bps hike at the July MPC meeting. Should inflation decelerate from July through September, a hold position may be in view. We see inflation moderating in July to 33.44% y/y on the back of high base effects

Global: U.S. stocks slumped Friday in another washout, as businesses around the world scrambled to contain the effects of a disruptive technology outage. The S&P 500 fell 0.7% to close its first losing week in the last three and its worst since April. The Dow Jones Industrial Average dropped 377 points, or 0.9%, while the Nasdaq composite sank 0.8%.  Friday’s moves came as a major outage disrupted flights, banks and even doctors’ appointments around the world. In the bond market, yields ticked higher. The yield on the 10-year Treasury rose to 4.23% from 4.20% late Thursday. In other markets, indexes were mostly lower in Europe and Asia.  The pan-European STOXX 600 index (STOXX), closed 0.8% lower, slipping to a more than two-week low and logging a weekly decline of more than 2%, its biggest weekly fall so far this year. Stocks fell 2% in Hong Kong and rose 0.2% in Shanghai after Chinese officials briefed reporters in Beijing on the outcome of a top-level meeting of the ruling Communist Party.

What will shape markets in the coming week?

Equity market:  The market was able to recover from last week’s 35bps loss, largely due to the telecoms sector, as the ASI gained 87bps w/w. We are likely to see further bearish sentiments kick off trading activities next week; cautious trading is recommended as Q2’24 earnings start to trickle in.

Fixed Income: We expect tepid trading in the secondary market in the coming week, as investors await the MPC decision on policy rate. We also expect the bond auction scheduled for next week to influence trading activities in the bond market.