When the Global X Nigeria Index ETF (NYSE: NGE[FREE Stock Trend Analysis]) debuted six weeks ago, traders familiar with the country and the oil patch immediately pondered just correlated to oil prices and headlines the new ETF would be.
Not surprisingly, NGE, the lone ETF to exclusively track Africa's largest oil-producing nation, is showing a noticeable sensitivity to oil news and prices. In the past month, NGE is up 3.7 percent while the U.S. Oil Fund (NYSE: USO) is higher by almost five percent. Going back a bit further, in the first two week's of NGE existence, West Texas Intermediate futures fell 7.3 percent, taking NGE down 8.1 percent in the process.
The new ETF is surprisingly steady Monday, trading unchanged after Nigeria's April oil output figures were released over the weekend. Last month, Nigeria pumped an average of 1.734 million barrels per day, down from 1.746 million barrels per day in March, Guardian Nigeria reported, citing the Organization of Petroleum Exporting Countries.
OPEC member Nigeria depends on oil production for 80 percent of government revenue, which is to say falling output at the hands of increasingly ambitious militant rebel groups is not good news.
That proof is in the pudding. The Central Bank of Nigeria said the country earned $10.1 billion in first-quarter oil revenue, well below the $11.6 billion taken in during the fourth quarter of 2012. The problem of declining oil revenue in Nigeria could get worse before it gets better.
The Minister for the Economy and Minister of Finance estimates the country is currently losing $1 billion a month in revenue due to production issues, according to the Guardian.
That is a significant loss of revenue for a frontier market and an issue that investors need to be aware of with an ETF that devotes over 24 percent of its weight to the energy sector. International oil companies operating in Nigeria, such as Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-A) must contend with increasing levels of theft and attacks on oil assets in the Niger Delta, home to the bulk of Nigeria's oil production.
Oil theft is another major issue not only for Nigeria, but for NGE as well. Estimated losses due to theft are about 300,000 barrels per day and that has Nigeria staring at 2013 output levels of 2.1 million to 2.2 million barrels per day, well below the nearly 2.53 million barrels per day that the government used for its 2013 budget assumptions, according to the Guardian.
And it is the oil theft issue that underscores the profit/peril nature of investing in Nigeria. Africa's second-largest economy behind only South Africa, is forecasting 2013 GDP growth of 7.6 percent and is aiming for equity market capitalization of $1 trillion by 2016. Additionally, nearly 43 percent of 5 million investors in Nigeria's equity market are foreign investors, Ventures reported, highlighting the notion that outsiders do see opportunity in Nigeria.
For now, however, the economy and NGE's near- to medium-term fortunes will likely be driven by oil production and prices.