OPEC + taper, inflation and Gold in focus

By Lukman Otunuga, Senior Research Analyst at FXTM

Nigeria’s All Share Index was on route to conclude the last trading week on a steady note despite coronavirus cases topping 34,000 in Africa’s largest economy.

Economic fundamentals from Nigeria have been nothing to celebrate about, thanks to deep wounds inflicted from lockdown restrictions and depressed oil prices. To add fuel into the fire, China’s latest growth and retail sales figures have triggered fears around a shaky economic recovery – something that is bad news for emerging markets and economies with close trade ties. However, local shares may find support from vaccine hopes and expectations of further stimulus for pandemic-hit economies.

OPEC and Co. have decided to taper production cuts from 9.7 million barrels per day to 7.7 million barrels starting from August 2020. While oil demand has jumped in recent weeks due to easing lockdowns, reducing production cuts may be premature given the state of the global economy and rising coronavirus cases in the United States and parts of Asia.

OPEC expects the increase in supply to be countered by countries like Nigeria that failed to meet full compliance on production cuts. With Nigeria joining Iraq and Angola by cutting production by a further 842,000 barrels a day through September, the next few months could be rough and rocky. An unfavourable scenario where oil prices fail to push higher could mean less export earnings and government revenues for Nigeria, which has only been able to meet 56% of its targeted revenue from January to May.

To add insult to injury, inflation accelerated for the 10th straight month in June as restrictions on foreign exchange and border closures inflated prices. Consumer prices hit 12.6% last month, its highest level in two years and may push higher thanks to a weaker naira, low oil and dollar shortages. Given how inflation has found comfort above the Central Bank of Nigeria’s target band of 6%-9% for over five years, there is little room for the CBN to ease monetary policy.

On the bright side, Nigeria has for the first time refined its own gold and purchased the finished product into a new gold reserve. This move could signify the start of using precious metals to boost its foreign exchange reserves. Given how the metal is trading at levels not seen in 9 years above $1800, this welcome development should boost sentiment towards the economy. Fundamentally, gold continues to draw support from lower interest rates, global growth concerns, geopolitical tensions and US-China trade tensions among many other negative themes. Prices have the potential to test $1820 and beyond if a weekly close above $1800 is achieved.