Oil Price Shocks and Oil Sector Stock Prices in Nigeria

Description

– Oil Price Shocks and Oil Sector Stock Prices in Nigeria –

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Abstract

This study investigates the impact of oil price shocks on oil sector stock prices in Nigeria using a high frequency data between January 2000 to December 2010.

The empirical results indicate that no significant effect of oil price is found on oil sector stock prices but there are significant effects of such macroeconomic variables as interest rate, exchange rate and real gross domestic product on oil sector stock prices in Nigeria. 

Therefore, the volatility in oil price does not necessarily influence the movement of oil sector stock prices in Nigeria

Introduction

1.1 Background of the 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.

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