Market Overview

Nigeria ETF Already Showing Oil Correlation

Nigeria ETF Already Showing Oil Correlation

The newly minted Global X Nigeria Index ETF (NYSE: NGE) is trading lower by 2.5 percent Wednesday, reaching its lowest level since debuting exactly two weeks ago.

The culprit behind the new ETF's Wednesday woes will not come as a surprise to investors that are even remotely familiar with Africa's second-largest economy.

Oil futures are getting slammed a day after the International Monetary Fund trimmed its outlook for global economic growth. New York-traded oil for May delivery is lower by nearly 1.7 percent and that comes on the heels of an almost three percent decline.

The June contracts are in even worse shape with West Texas Intermediate for delivery in that month lower by 2.64 percent and Brent crude for June delivery down 2.37 percent on the ICE Futures Exchange.

The correlation between the new Nigeria and oil futures has been obvious. NGE debuted on April on April 3 and the highest closing price for the ETF since then is $15.83. On that day, West Texas Intermediate for June delivery was trading around $93.50 per barrel. Today, that contract is hovering around $86.70 per barrel.

Said another way, that contract has fallen about 7.3 percent since NGE came to market. From its highest point to today's low, the Nigeria ETF is off 8.1 percent. That is a pretty good correlation and one that is not too surprising.

The energy sector accounts for about 80 percent of Nigeria's government revenue, not surprising given that the country is Africa's largest oil producer and a member of the Organization of Petroleum Exporting Countries.

NGE reflects Nigeria's status as an OPEC member with a 24.3 percent weight to the energy sector. Only financial services at 41.3 percent account for a larger part of the ETF's sector weight. Nigeria primarily produces light, sweet crude, a variety of crude that is prized for its ease in refining.

In January, Nigeria was the third-largest OPEC supplier to the U.S. behind Saudi Arabia and Venezuela and the fifth-largest supplier to the U.S. overall behind those countries, Canada and Mexico, according to the U.S. Energy Information Administration.

In the near-term, slower global growth is an obvious burden on oil futures and that in turn could hamper NGE. That said, Nigerian equities have surged this year and GDP growth there is forecast to be six percent this year. Adding to the long-term bull case for Nigeria is the fact that it is home to 15 percent of Africa's population and could be the same size as the U.S. by 2050, according to Jim O'Neill, chairman of Goldman Sachs Asset Management.

In the near- to medium-term, however, Nigeria, and by virtue NGE, face an oil problem. As in one of its best customers, that being the U.S., is buying less oil. Arguably, few exporters of oil to the U.S. have been hit by soaring U.S. production the way Nigeria has been.

January imports of Nigerian crude spiked, but that number was seen as an anomaly. In February, U.S. imports of Nigerian oil fell by 352,000 barrels per day, according to Bloomberg.

Of course, Nigeria can find willing buyers in Asia, namely China, but shipping costs eat away at Nigeria's profit in that scenario. The trip to Tianjin, China, is 12,172 miles from Nigeria's Bonny Terminal, more than double the distance to New York Harbor, according to All Africa.

Slowing growth and falling oil imports to the U.S. mean other Nigerian industries will need to chip in to drive domestic demand and facilitate a more diverse economy. That scenario would boost the long-term allure of NGE.

For more on Nigeria, click here.

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