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All that glitters is not gold…

but does it have to glitter to be gold?

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From the famous words in Shakespeare’s The Merchant of Venice: “All that glitters is not gold; often have you heard that told: many a man his life hath sold.”

Put simply, things that often appear precious may not always turn out to be so. This month, however, I will explore a commodity that proves the opposite to be true. A seemingly unglamorous, not particularly attractive commodity, which has sparked the interest of many: crude oil. It is a topic that is luring huge investment opportunities on our continent.

Even though alternative energy sources abound, crude oil is likely to remain a vital source of energy across the world for many decades to come. Life without oil would be virtually impossible. It is the most important raw material; generating heat, driving machinery and fueling vehicles and airplanes. Its components are used to manufacture most chemical products, including plastics, detergents, paints and even medicines.

Most countries are significantly affected by developments in the oil market, either as producers or consumers, or both. Oil catered for about 34% of the world’s energy needs in 2008. It is expected to continue being a leading component of the world’s energy mix – 30% in 2030, according to the International Energy Agency (IEA).

About two-thirds of oil is used for transportation in the United States and Canada. In the rest of the world it is more commonly used for heating and power generation.

Brent crude oil is derived from the ‘Brent blend’. It is a combination of crude oil from 15 different oil fields in the North Sea, off the coast of the UK and Norway. This blend is used to price two-thirds of the world’s internationally traded crude oil supplies, making it an obvious choice as the benchmark of crude oil.

Brent crude oil is excellent for making gasoline, and is highly sought after, particularly in industrialized nations. It is a ‘light’ or ‘sweet’ crude oil because it contains less sulphur.

This type of ‘sweet’ crude oil is also produced in a few countries in Africa, with Nigeria being our leading exporter. In fact, Nigeria is the largest producer of sweet oil in the Organization of Petroleum Exporting Countries (Opec). Known as ‘Bonny light’, it is similar in composition to the petroleum extracted from the North Sea.

There are two widely used Brent crude oil futures: the West Texas Intermediate (WTI) and the Opec price basket.

Opec is an organization of 12 oil-producing countries that effectively controls the world’s oil. Opec members pump out 42% of the world’s annual supply, thereby controlling 61% of exports. These 12 countries hold 80% of the world’s proven oil reserves, to last for 113 years. Opec’s decisions, therefore, are critical to countries that depend on oil imports.

Opec has stated quite adamantly that its goal is “to manage the world’s supply of oil”, which it does “to make sure its members get what they consider a good price for their oil”.

Opec’s second goal is to reduce oil price volatility. Oil and energy minis-ters from Opec members meet at least twice a year to coordinate their oil production policies. Each member country must abide by an honor system, where it agrees to produce only a certain amount. But countries that produce more suffer no sanctions or penalties.

The Opec members are: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Vene-zuela. Saudi Arabia alone produces enough oil to materially impact the world’s supply.

Opec has a basket price – an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi Arabia, Dubai, Venezuela and Mexico – which is used to monitor world oil market conditions.

The WTI is a blend of several US domestic streams of light sweet crude oil. It is also considered a key driver of growing global crude oil supply because of its unique immediacy, breadth and depth of pricing. In times of uncertainty, of massive political unrest or financial crisis, the market tends to flock to the WTI instead of the Opec price basket.

Brent crude originally traded on the open outcry International Petroleum Exchange in London. But after 2005, it traded on the Electronic Intercontinental Exchange, known more commonly as ICE. Brent crude financial futures are also traded on the New York Mercantile Exchange. One contract equals 1,000 barrels, quoted in US dollars.

From the mid-1980s until 2003 Brent crude oil averaged $25/barrel.

My technical analysis shows that Brent crude oil (listed on the ICE) is consolidating within a symmetrical triangle on the monthly chart. This triangle is a horizontal cone-shaped pattern, which could break out in

either direction. It often forms after a rally or a decline. In this case, it has formed within the major bull trend.

A positive breakout of this pattern would be signaled above $120/barrel, with the long-term objective situated at $162/barrel – through the 2008 all-time high of $147/barrel. Alternatively, Brent crude oil could breach the lower slope of the pattern, which would be signaled below $96/barrel, in which case the downside objective would be at $54/barrel. I foresee an upward break through $120/barrel, and a 34% appreciation in price in one to five years – a very brave call. However, this surge won’t happen in a straight line. Brent crude may or may not fulfill that objective, but historically, the longer it takes a pattern to form, the bigger the breakout. And as my leading indicators are bul-lish, a positive breakout seems more probable.

However, the question is twofold: how will a positive breakout in the Brent crude oil price affect African economies, and how will such a breakout benefit our oil companies?

Oil is one of the most powerful tools of trade in the world, and after the Middle East, Africa is one of the world’s largest oil producers. Further analysis sees great potential in Africa, but a lot of challenges have hindered this prospect.

Sixteen African countries are oil exporters, with 500 oil companies participating in African hydrocarbon exploration. According to the EIA, Africa’s proven oil reserves have grown by nearly 120% in the past 30 years, from 57 billion barrels in 1980 to 124 billion barrels in 2012.

In 2012, the BP Statistical Energy Survey reported that the continent produced an average of 8.8 million barrels of crude oil per day in 2011, which is just over 10% of the global output.

In November 2012, Chatham House research found that only 500 wells have been drilled in East Africa to date, compared to the 15,000 wells that exist in West Africa. In 2010, Africa’s oil production represented 12.4% of the world’s total crude oil output, with exporters achieving a higher share, at nearly 20% of the world’s total exports of crude.

Africa remains largely untapped for oil, and at present, many of the oil-producing countries with great promise are finding ways to create a safer haven for investors.

The abundant oil reserves in Africa are undoubtedly the glitter that is attracting many overseas investors. It comes at a time when minerals such as iron ore and copper, which were once economic mainstays, have reached a gradual decline.

But will a higher oil price affect the African economy negatively or positively?

Bear in mind that oil prices are still lower than they were in the late 1970s and early 1980s in real terms, if inflation is adjusted. High oil prices will affect certain African economies differently, depending on whether they are net exporters or net importers.

Oil-exporting economies have a greater advantage because an increase in oil revenues improves their balance of payments. These countries will stand to benefit from the influx of foreign revenue. It can accelerate the implementation of poverty-reduction strategies and develop infrastructure, which ultimately increases employment levels.

However, the biggest challenge of the coming boom will be to ensure that these benefits filter down to ordinary Africans.

There are only 16 net oil-exporting countries in Africa, with 38 countries being net oil importers. High oil prices in these nations will have an adverse impact on businesses, consumers and government budgets in particular. Their terms of trade could deteriorate, thereby affecting their balance of payments, which could lead to lower economic growth.

For oil-importing economies, high prices could increase import bills with adverse effects on inflation, production and employment.

In July 2009, the African Development Bank found that the real impact of high oil prices on African economies is relative. African economies are changing and significant improvements in terms of macroeconomic management are being reported, especially a reduction in inflation. Governments have passed on price increases to consumers, moderated them with subsidies and tax reductions, or have placed pressure on oil companies to keep prices down.

Revenues of the big oil companies in Africa will obviously surge. The world’s population is increasing, becoming more middle class and prosperous, buying more cars and using more oil. For example, the UK reported about 30 million cars with a population of 70 million. It is evident that Brent crude oil will be in demand in the long term, which ultimately advocates my call of a positive breakout of the long-term symmetrical triangle.

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