Meristem projects oil, banking sector gains amid rising crude prices
Investment company Meristem Securities Limited has predicted that oil and banking equities in Nigeria could benefit from the current increase in global crude oil prices, primarily driven by geopolitical conflicts in the Middle East.In its most recent update on macroeconomic conditions and the capital market, Meristem indicated that the rising trend in oil prices might have significant effects on Nigeria’s economy, identifying upstream oil firms and commercial banks as major beneficiaries.
The report named Seplat Energy Plc, Geregu Power Plc, and Aradel Holdings Plc as firms likely to experience enhanced earnings shortly, due to their upstream involvement and ability to capitalize on higher oil prices.
“Although rising inflation and interest rates may continue to pressure the real sector by squeezing profit margins and restricting access to credit, banks are expected to gain,” the report stated. “The prevailing interest rate environment supports increased net interest income, enabling banks to maintain earnings and attract investor interest.”
Meristem also pointed out the wider macroeconomic implications, noting that consistently high oil prices could strengthen Nigeria’s foreign exchange reserves and government revenue, thereby improving fiscal health and exchange rate expectations in the short to medium term.
“Considering that crude oil is Nigeria’s main source of foreign exchange earnings, rising global prices could result in more robust FX inflows, especially if it is paired with better capital flow management and increased liquidity in the official FX market,” it emphasized.
However, the report identified ongoing underperformance in crude oil production as a significant risk. Even with elevated prices, Nigeria continues to produce below its targeted outputs, which could restrict the potential benefits.
It also cautioned about possible inflationary effects under Nigeria’s deregulated fuel pricing system. A surge in global oil prices, it warned, is likely to be reflected in domestic fuel prices, impacting transportation costs and potentially leading to a rise in food inflation.
Regarding the outlook for the bond market, Meristem noted that ongoing increases in global interest rates—particularly from the U.S. Federal Reserve—alongside local inflation worries, are expected to keep yields appealing in Nigeria’s fixed-income market, maintaining investor interest.
In summary, while the overall outlook is mixed, Meristem anticipates a shift in investor confidence towards oil and banking stocks, with equities in the real sector likely to experience lackluster performance due to inflation and restricted credit availability.
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