Like fund managers, Nigeria needs to reconsider oil-based portfolios

Like fund managers, Nigeria needs to reconsider oil-based portfolios

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Hedge funds and portfolio managers are reviewing assumptions that oil prices will rise and liquidating bets because the U.S.-China trade war paints a gloomy global economic outlook and Nigeria needs to see this as an invitation to act.

Data compiled by Reuters show that money managers have reduced their net long position over the four weeks to May 21. Net long refers to a condition in which an investor has a portfolio consisting of more long positions than short positions in a given asset, market, portfolio or trading strategy. Investors who are net long will benefit when the price of the asset increases.

The net long concept can also be applied to Nigeria economy’s dependence on oil. Africa’s biggest oil producer holds a net long position on oil. Unlike fund and portfolio managers who can move swiftly, Nigeria is unable to do so.

Nigeria will find itself in a precarious situation if escalating U.S.-China trade tensions drastically weaken oil prices. It is widely known that Nigeria relies heavily on crude oil exports which account for over 90 percent of export earnings and over 70 percent of government revenues.

A sharp decline in oil prices has the potential to threaten Nigeria’s economic recovery while disrupting exchange rate stability. The potential decline in foreign exchange reserves from lower oil is likely to weaken the Naira consequently translating to rising inflationary pressures.

“Consumers and businesses will feel the heat as inflationary pressure mounts, while the drop in foreign reserves may complicate the Central Bank of Nigeria’s efforts to defend the Naira” Lukman Otunuga, research analyst at FXTM told BusinessDay in an emailed response.

For fund and portfolio managers, the change in the net long position in the week to May 21 was almost exclusively due to liquidation of bets that prices will rise, not the opening of fresh short positions that prices will drop, OilPrice.com, an online oil intelligence and news platform reported.

Portfolio managers have been selling lately Brent Crude and WTI Crude, as well as U.S. gasoline futures, but they have been buying U.S. heating oil and European gasoil, possibly expecting increased demand for heating oil and gasoil in the run-up to the new shipping fuel regulations by the IMO starting January 2020, according to Kemp.

Nigeria needs to do something similar and start liquidating its net long position on oil by intensifying efforts at economic diversification. Nigeria’s economic potential certainly lies beyond oil with a strong focus on agriculture. With a very youthful population and fertile land, the nation has the potential to create employment through agriculture which will not only result in food security but support economic growth.

“While there is no single silver bullet to solve our economic problems as such, it is my strong belief that for Nigeria to fast track its economic growth rate there has to be deliberate and sustained investments in basic infrastructures, particularly power and transportation; human capital; agriculture; and healthcare” Adekunle Olumide, a retired diplomat who served on various United Nations’ social and economic desks.

When Nigeria develops the ability to export agriculture products across Africa and the globe, this will reduce the reliance on oil ultimately insulating the nation from oil-induced external shocks. While other non-oil sectors such as telecommunications, Information Communication Technology and even manufacturing have the potential to elevate the nation, heavy investments in infrastructure are needed to make this possible.



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