OIL PRICE SHOCKS AND OIL SECTOR STOCK PRICES IN NIGERIA

OIL PRICE SHOCKS AND OIL SECTOR STOCK PRICES IN NIGERIA

  • The Complete Research Material is averagely 76 pages long and it is in Ms Word Format, it has 1-5 Chapters.
  • Major Attributes are Abstract, All Chapters, Figures, Appendix, References.
  • Study Level: BTech, BSc, BEng, BA, HND, ND or NCE.
  • Full Access Fee: ₦4,000

Get the complete project » Instant Download Active

CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND OF STUDY

The changing international oil market has posed great concerns for Nigeria’s fiscal outlook. The global financial crisis has led to slow growth across the world’s economies, resulting in lower demand for commodities, especially oil. This impact has been transmitted through several sources to the Nigerian economy, especially through oil price fluctuations and stock market dynamics due to the reappraisal for planned investments or complete stoppage of previously committed programmes of investment. However, the speculative behaviour and investment activities have helped to buy up crude oil prices internationally, the reality of the global recession is beginning to be fully appreciated across the globe. The adverse impact of the crisis is more evident and direct on international prices of oil and the world capital market. The recent movements of oil prices are apparent in their unprecedented decline from record of about US$147/barel in July 2008 to about $50/barrel in January 2009 while the daily basket price has hovered between $38and $44.

The impact of falling oil prices on stock market differs from country to country depending on whether the country is an oil-exporter or oil-importer. In an oil-exporting country, a rise in world oil prices improves the trade balance, leading to a higher current account surplus and an improving net foreign asset position. At the same time, increase in oil prices tends to increase private disposable income in oil-exporting countries. This increases corporate profitability, at the same time raises domestic demand and stock prices. In oil-importing countries, the process works broadly in reverse: trade deficit are offset by weaker growth and, over time, stock prices decrease (Abdelaziz et. al., 2008)

This development in the global economy, which has posed great challenge to policy makers across countries, is as a result of the increasing spate of fluctuations in the price of oil. The price of crude oil, which had stayed between $2.50 and $3 since


1948, rose from $3 per bbl in 1972 to $12 per bbl by the end of 1974, and from $14 per bbl in 1978 to $35 per bbl in 1981. The price of oil, went below $10 per bbl in 1986, but surged again to between US $18 and $23 in 1990’s. it crossed the US$40 mark in 2004; and rose to about US$60 from 2005 during the summer of 2007, the price of one barrel of crude oil jumped above US $70 and even crossed the US$145 mark in July 2008. The price staggered to US$80.50 in October 2009 and remained at an average of US$75 till August 2010.

An oil price change (increase), all things being equal, should be considered good news in oil exporting countries and bad news in oil importing countries, while the reverse should be expected when the oil price decreases (Ayadi, 2005). The challenge, however, of the combined effect of hikes in oil prices on economic growth for oil producing nations like Nigeria is really enormous. Huge inflow of oil revenues in Nigeria is more often associated with expansion in the level of government spending while periods of dwindling oil revenues are usually accompanied by budget deficits. There is no gain saying that Nigeria relies so much on revenue from oil exports but it equally massively imports refined petroleum and other related products. Evidence, for instance, shows that government spending, which before1999 remained well below N0.5 trillion, hit N1.02 trillion mark in 2001 and N1.5 trillion in 2004. The figures for 2006 and 2007 stood at N2.04 and N2.5 trillion respectively.

Since discovery of oil in a commercial quantity in Nigeria, oil has dominated the economy especially in Nigeria hence oil accounts for more than 90- percent of Nigeria’s exports, 25 percent of its Gross Domestic Product (GDP), and 80 percent of its government total revenues. Thus, a small oil price changes can have a large impact o the economy hence oil price shocks. For instance, a US $1 increase in the oil price in the early 1990s increased Nigeria’s foreign exchange earnings by about US$650 million (2 percent of GDP) and its public revenues by US$320 million a year. Nigeria’s reliance on oil production for income generation clearly has serious implications for its economy. Secondly, oil is an important commodity in the economy of any country in the world because it is a major source of energy for domestic and industrial commodity. Changes in the prices of either the crude oil or any of the end


products are expected to have impact on users and the nation at large. Oil prices traditionally have been ore volatile than many other commodity or asset prices.

However, it has been observed that the recent global economy melt down also contributed in the oil price shocks which has more adverse effect on oil importing countries than exporting countries. At the beginning of the crisis, oil price crashed below $40/b in the world market, which had serious consequences on Nigeria fiscal budget that led to the downward review of the budget oil benchmark price. Today oil price is oscillating between $60/b and $75/b.

Oil price shocks which are predominantly defined with respect to price fluctuations resulting from changes in either the demand or supply side of the international oil market (Hamilton, 1983; Wakeford, 2006). These changes have been traditionally traced to supply side disruptions. Two issues are identified regarding the shocks; first is the magnitude of the price increase, which can be quantified, in absolute terms or as percentage changes. Each of the shocks had connections with some movements in key macroeconomic variables in Nigeria. For instance, the 1973-74, 1979-80, and 2003-2006 periods were associated with price increases while the oil market collapse of 1986 is an episode of price decrease. During the first oil shock in Nigeria (1973-74), the value of terms of trade rising from 18.9 in 1982 to 65.3 by 1974. Government revenue, which stood at 8 percent of GDP in 1972 rose to about 20 percent in 1975. This resulted in increased government expenditure owing largely from the need to monetize the crude oil receipts. Investment was largely in favour of education, public health, transport, and import substituting industries (Nnanna and Masha, 2003). During the oil price shock of 2003-2006, Nigeria recorded increases in the share of oil in GDP from about 80 percent in 2003 to 82.6 percent in 2005. The shock was gradual and persisted for a while. This could be regarded as a permanent shock. The result of the shock was a favourable investment climate, increased national income within the period although a slight decline was observed in the growth rate of GDP.

The concerns regarding how rapidly the global financial crisis penetrated the Nigerian capital market, especially given that there is hardly any thriving domestic mortgage market in Nigeria is to be considered as one among the factors that affects


stock markets. The decline of indicators of activities on the NSE before the escalation of the crisis on the global scene became a source of concern for many. Emerging facts reveal that the crisis may have been made evident in the capital market through various channels. Foreign portfolio investment withdrawals and withholdings in order to service financial problems at the foreign investors’ home, as well as prospects of reduced FDI, are bound to affect investor confidence in the economic health of Nigeria. Evidence on the foreign portfolio withdrawals shows that the total financial inflows to Nigeria between 2007 and 2008 increased by 21%, while that between 2008 and 2009 was predicted to reduce by 38.6%. In a globalised world, transactions are carried out in different countries in integrated markets. The world has over the past two decades towards liberalization, although not well integrated into the world market, have been facing serious destabilizing effects in the past years especially since the emergence of the global financial crisis in July 2008. The capital market has been shrinking; major international hedge funds have been withdrawn; and the international credit line has faded out of loadable funds for domestic industry. Market capitalization fell by 45.8% in 2008, a sharp reversal of growth from 2007, when the market grew by 74.7% (Okereke-Onyiuke, 2009).

Stock market plays a very crucial role in assessing economic conditions of any country through improved stock returns usually signified by higher profit to firms. This consequently engenders economic growth and vice versa.

Basically stock exchange market serves as a channel through which surplus funds are moved from Lender-Savers to Borrower-Spenders who have shortages of funds (Mishkin 2000). Based on this premise, volatility in stock prices can significantly affect the performance of the financial sector as well as the entire economy. However understanding the origins of stock market dynamics has long been a topic of considerable interest to policy makers and financial analysts.

Policy makers are interested in the main determinants of these changes and its spillover effects on real activities. Financial analysts on other hand are interested in the direct effects time-varying dynamics exerts on the pricing and hedging of more exotic derivatives. In both cases, forecasting stock market dynamics constitutes a


formidable challenge but also a fundamental instrument to manage the risks faced by these institutions (Corradi, Distaso and Mele 2009).

The financial position of an economy that is mainly determined by the capital market is susceptible to its foreign exchange volatility. Also, the internationalization of capital markets has resulted in inflow of vast sums of funds between countries and in the cross listing of equities. This has therefore made investors and firms more interested in the volatility of exchange rate through oil price and its effects on stock market. Floating exchange rate appreciation reduces the competitiveness of export markets; and has a negative effect on the

domestic stock market (Yucel and Kurt, 2003). But, for import dependent economy like Nigeria, it may have positive effects on the stock market by lowering input costs.

Historically, in 1960, the Nigerian Stock Exchange (NSE) was formed and known as the Lagos Stock Exchange. In December 1977 it was renamed as The Nigerian Stock Exchange. Currently, The Nigerian Stock Exchange (NSE) consists of six branches and the Head Office is situated Lagos. The Trading System on the NSE is fully automatic. It recorded its annual market capitalization of N5.1billion in 1988 and ever since has continued to increase until 1997 when it dropped to N276.3 billion from N279.8 billion in 1996 and reduced further by N19.5 billion in 1998. Thereafter, it has been following an upward trend that got to its peak of N10, 301 billion in 2007 and later crumbled to N3343.5 billion in 2008 (CBN Statistical Bulletin, 2008).

PERFORMANCE OF THE NIGERIAN CAPITAL MARKET

An evaluation of the performance of the Nigerian Capital Market was accessed using some of the generally accepted criteria, which include:

(i)  Number of listed companies;

(ii)  Number of listed securities;

(iii)  Size of the market or market capitalization; and

(iv)  All-share price index, which is a measure of the performance of the market.

The analysis of the major indicators of activity in the capital market showed that the market has experienced remarkable progress since 1986. Transactions in equities in the market based on its current level of development could be considered to be


weakly formed as the level of information dissemination and processing to influence market behavior remained weak. However, with the computerization of trading and increased transparency in delivery of corporate information, the market has become more efficient. Transactions in the market recorded in crews in the number of listed securities, companies, market capitalization and price index during the period under review. The improved


You either get what you want or your money back. T&C Apply







You can find more project topics easily, just search

Quick Project Topic Search