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What rising geo-political tensions mean for Nigeria

Oil production

Nigeria is caught in the middle of an escalating global trade war and mounting tensions in the Middle-East, both holding big implications for Africa’s largest oil producer.

While the trade war between the US and China could impair global growth and dampen demand for oil thus causing a fall in prices, oil-supply-threatening tensions in the Middle East could lead to reduced supply and higher oil prices.

On Monday, the geo-political tensions took a turn for the worse after China detailed plans to retaliate against higher tariffs by the United States on Chinese imports by imposing extra tariffs on about $60 billion worth of American goods, while Saudi Arabia said two of its oil tankers were attacked while sailing toward the Persian Gulf.

The tankers were damaged in “a sabotage attack” off the United Arab Emirates coast on Sunday, state-run Saudi Press Agency reported. The vessels were approaching the Strait of Hormuz, the world’s most important chokepoint for oil shipments.

The UAE foreign ministry on Sunday reported an attack on four commercial ships. No one has claimed responsibility. Two of the targeted tankers were registered in Saudi Arabia, one was flagged in the UAE and the other in Norway, according to a UAE government official.

Crude oil prices gained 2 percent after news of the Saudi tanker attack broke, only to fall 0.7 percent to below $70 per barrel as the market digested the impact of a prolonged global trade war.

“The escalating global tension raises the risk of a recession,” said Bismarck Rewane, an economist and CEO of financial advisory firm, Financial Derivatives Ltd.

“If there’s a recession, oil demand will reduce and prices will fall, to that extent the Nigerian economy is adversely impacted,” Rewane told Business Day.

Higher US tariffs will drive up the Federal Reserve’s preferred measure of underlying inflation, and further escalation could raise consumer prices even more and dent US growth, Goldman Sachs Group Inc. economists said in a research note.

The movement in oil prices is closely watched in Nigeria, where oil accounts for nearly 70 percent of government revenue. Nigeria can ill-afford any drastic decline in oil revenue at a time when the government is pressed for cash and has a long list of local and international creditors to repay.

Abuja has remained reliant on crude oil after several attempts to break an over two decade-old dependency on the commodity. It’s so bad that the price movement of a commodity like oil has become a proxy for economic performance.

When oil prices bottomed in 2016, the economy slid into a recession for the first time in 25 years.

When oil prices recovered and production stabilised in 2017, the economy expanded in the second quarter after five straight quarters of contraction through Q1 2017.
The rising geo-political tensions make a strong case for Nigeria to wrest the economy off the control of external factors.

“The economy remains at the mercy of factors we don’t control and until we take our destiny into our own hands, the risk of another recession is always lurking,” a fund manager who sits in Lagos said on condition of anonymity, as he was not authorised to speak publicly.

Iran’s Foreign Ministry Spokesman Abbas Mousavi described the maritime incident as “concerning and regrettable” and called for efforts to shed light on what exactly happened, the semi-official Tasnim News reported. He warned against “foreign seditious plots to upset the region’s security and stability”.

Global crude benchmark Brent for July settlement rose as much as $1.38 on Monday to $72 a barrel on the London-based ICE Futures Europe exchange.

US stocks sank in New York, with the S&P 500 headed for its biggest decline since January 3. Trade-war fears hit the shares of companies from Apple Inc. to Boeing Co., while Treasuries rallied with the yen on demand for haven assets.

China’s move to hike tariffs came in response to the US decision last week to increase levies on $200 billion in Chinese imports to 25 percent from 10 percent. Trump on Monday accused China of backing out of a deal that was taking shape with US officials, saying Beijing reneged on an agreement to enshrine a wide range of reforms in Chinese law.



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