Nigerians should brace for turbulent times ahead – 1

Crude oil is still the most important commodity in the world today; more important than gold. It is the commodity that powers most of the world; that keeps us all moving. It is the commodity that lifts a great many economies and puts others in trouble. It is the commodity that very serious countries are […]

Crude oil is still the most important commodity in the world today; more important than gold. It is the commodity that powers most of the world; that keeps us all moving. It is the commodity that lifts a great many economies and puts others in trouble. It is the commodity that very serious countries are trying to kick, as you would kick an addiction. For countries like Nigeria, this is our life. 95% of government’s foreign exchange is derived from it. And it constitutes 25% of our GDP. Yes a mere 25% ‘surprisingly’, but with huge linkage effects that could bring the economy to its knees in a second.  In Nigeria as in elsewhere, crude oil is the commodity that people fight wars over. It is the commodity that binds countries, and over which its constituent parts seek secession. It is the commodity that determines the size of budgets, and the aspirations of nations, like Nigeria. It is a commodity that every country desires to have in its backyard, after all you can have some oyibo people come in, sink their equipment into the soil, extract some and pay you truckloads of money!
For the past 13 years Crude Oil exporting countries have been having a field day. Countries like Nigeria which exports crude oil and imports refined products, have enjoyed some of the glow, but not much. Of late we frittered our money on chasing Boko Haram and stealing the rest.  Admittedly though, a few billionaires have been created in the run-up.  Some will also argue that Nigeria has not had prosperity and peace coinciding since perhaps its independence.  The first oil boom of the early 70s did coincide with the end of the civil war though. But shortly after, there was a crash in prices and Nigeria’s economy went into a tailspin that it didn’t get out of until 2006, so to speak. The collapse of crude oil prices circa 1975, saw Nigeria being unable to pay salaries, fund governance, build infrastructure.  We ended up queuing with other mostly African nations at the World Bank and IMF, for sundry loans from which we never recovered until 2006. We needed the loans, even for servicing the debt that we had taken earlier!  Of course it is easy to borrow but difficult to repay.  
Crude Oil prices have hovered at around $108-$115 for the Brent Crude, upon which our Bonny Light Sweet Crude (sounds almost yummy), is modeled, for five straight years give or take. In fact, in 2007/8, crude oil prices reached an all-time-high of $147 per barrel.  It slipped briefly in 2009 under President Yaradua, to about $47 but picked up quickly later. Since then it has maintained a plateau, dipping slightly in 2012 to about $92 and remaining up ever since; until the current panic.  The question to ask is; is this current dip likely to be over in a jiffy as well?  The answer really is, no one can tell. No one. Why? This is explained in something called the Random Walk Theorem in statistics. This theorem basically states that if you plot a graphs of say, commodity prices, or stock markets over a long period of time, what you will get will seem like a ‘random walk’ i.e. the path of a drunk person heading home from the pub!  It will be all over the place. High today, low tomorrow. Up the next day, and the next day and the next day, down the next, the next, and up on another day.
Why is this so? It is because soooo many people are playing in commodity or stock markets that you cannot tell what their intentions and inclinations are on a given day, and what their decisions will be. Someone can happen on a lot of money and decide it is time to buy plenty of a commodity of stocks, when everyone else believes it is time to sell. Someone can go broke when everyone thinks the markets are doing fantastically well, and decide to sell to meet other obligations when others are buying. The movement of the market, up or down, depends really on the balance of opinions/expressions on a daily basis. And those opinions depend on way too many things – mood, personal events, the economy, professional events, ego, greed, fear, fundamentals, mental problems, superstition, voodoo, religion, the past, the present, the future, historical analysis, technical analysis, fundamental analysis and many more things.
Because the crude oil market is important, most people will think that whatever happens there benefits from the best of analysis. But does it?  Granted, there are many organisations with the smartest of people in that sector, yeah? There are the major oil companies.  There are platforms on which crude oil is traded in regulated fashion.  There are even analysts whose sole concern on a daily basis is the health of the crude oil markets, or lack of it. And there are futures traders.  Yes, futures traders. They trade, literally speaking, the Future. But let me break it down. Futures markets exist for people to be able to buy, or sell, what does not exist today, by signing contracts today. They are very regulated markets – like stock exchanges – where people can assure the future by buying and selling say, crude oil, today for delivery in 90, 180, 270 days.
Why are Futures Traders important? They are because they form an important part of what is called Price Discovery. In fact, it is to the Futures Markets that everybody turns when they want to take decisions in the immediate term. Like, ‘do I buy Barclays Bank Stocks? Ok, what is the Futures Market doing? Are people selling Barclays Bank Futures lower than today’s price? If they are then no chance! I’m not buying Barclays Bank.!”  Or vice versa.  Ordinarily, the price of a commodity in the future, because of the added advantage of assurance, as well as time value of money, should be higher than in the immediate term (spot). But there are times the guys in that market decide that a product is overpriced for now and that in 90, 180, 270 days, it should cost less, and they stake their bets accordingly.
For the crude oil market, the futures traders have of late been doing more selling than buying, thereby informing those who trade immediate contracts that prices should be lower in the near future. As if on cue, crude oil prices are dropping globally as we speak, with the Brent Crude selling below $90 for the first time in 4 years, today.  Prices have fallen 25% in the last few weeks. As alarming as that sounds, and imagining the full negative impact on every Nigerian, something tells me that the price will drop below our budget benchmark of $77per barrel this time. And no one knows for how long it will stay low. This will have devastating effects on the economy as I will explain next week.