At least 35 people died in a bombing and shootout at the central mosque in Kano, northern Nigeria’s largest city, on 28th November
While the rest of us were contemplating our forebears and noshing on turkey and stuffing, the ministers of OPEC last Thursday said they would not cut production.
The immediate result was a drop in oil prices, which have already tumbled more than 30% this year. Today, prices recovered some of their losses, with January futures on the U.S. benchmark up 4.5% to $69.10 per barrel and the international Brent price up 3.6% to $72.70. But the broader trend of lower prices is hurting oil exporting countries, even as cheaper oil exports help importing nations curb inflation.
And the member of the Organisation of the Petroleum Exporting Countries “at most immediate risk for civil unrest in this price environment is probably Nigeria.”
Nigeria will have elections this year, and the Islamic extremist group Boko Haram has flourished in the North of the country, which also has a significant Christian population. RBC Capital Markets writes that “in a country plagued by deep regional and religious divisions, oil revenue is literally the glue that binds the fractious elites together.” That glue is getting brittle. RBC’s Helima Croft, head of commodity strategy, and Jay Govender, associate strategist, add:
“Nigeria has experienced coups in previous low price environments due in part to drying up patronage funds. While the country currently bases its budget on a $77 oil price, the extra revenue is deposited in the excess crude account (ECA). In theory, the ECA is supposed to ensure macroeconomic stability by allowing the government to be able to keep spending steady during periods of oil price fluctuation. However, in practice it has been used to keep powerful politicians and military officials loyal to the government. Nigeria’s highly respected finance minister announced last month that the ECA, which stood at nearly $22 bn in 2008 (World Bank), would likely be empty by the end of December in part because of billion dollar transfers to state governors.
The lack of extra cash could prove to be especially painful as the country heads into national elections on February 14, 2015. Nigerian elections are costly affairs and ECA funds in the past have been used to pad election war chests. In addition to raiding the ECA accounts, elites have also turned to crude theft as a way to help finance elections. Not only do crude theft levels spike around elections, but also more production is shut-in because of the infrastructure damage that accompanies theft as well as the increase in generalized election-related violence around production facilities. For example, fighting between armed gangs in Warri caused Shell (RDSA) andChevron (CVX) to halt operations at three facilities in the run up to the 2003 polls, resulting in the temporary loss of 800kb/d of production. With less oil money around to grease the election machinery, crude theft and production outages could easily exceed levels seen in prior polls. Also given that the military is already over-stretched fighting a virulent Islamist insurgency in the north, it will be hard pressed to contain any rise in unrest around the February elections. Hence, Nigeria is a place where the price route may actually lead to unintended production losses.”
In the broader study of OPEC politics and oil prices, RBC concludes:
“Just as the policy of letting prices free fall had a limited shelf life in 1986, we contend that it does today as well.”
Nigeria’s central bank hiked interest rates unexpectedly last week, and Teneo Intelligence cheered Nigeria’s rate move.
The Global X Nigeria Index ETF (NGE) fell 4% today and is down 30% this year, while the Market Vectors Africa Index ETF (AFK) fell 3% and is down 10.5% this year. The iShares MSCI Emerging Markets ETF (EEM) fell 1.6% today and is down more than 2% this year.
