Page 6 - AfrElec Week 16

AfrElec COMMENTARY AfrElec
Oil market’s woes ensnare Nigeria
Demand destruction and inadequate storage are not new problems for Africa’s largest crude producer
NIGERIA
WHAT:
The factors that drove WTIpricesbelowzero have been at work in Nigeria for some time
WHY:
Abuja is not earning enough to recoup costs or meet budget targets
WHAT NEXT:
The country’s best option may be to work harder to adhere to OPEC production quotas
WORLD oil markets started the week on a grimly memorable note. On Monday, WTI prices not only dropped below zero for the first time in history but plummeted all the way down toabout-$40.00perbarrel.Theyrecoveredsome ground on Tuesday but did venture into negative territory again.
The downward plunge seems to have been driven partly by non-fundamental factors – namely, the imminent expiration of the front- month futures contract and, according to some reports, technical activity by traders. But there certainly were fundamental factors at work – chiefly, ongoing demand destruction stemming from the coronavirus pandemic, signs that Saudi Arabia intends to continue pumping oil at top speed until the new OPEC+ agreement takes effect on May 1 and full inventories that leave many producers with nowhere to store their crude.
And it was these fundamentals that ended up driving oil prices on April 20, draining the mar- ket of any optimism left over from the unveiling of the new OPEC+ agreement on April 12.
Unrelenting pressure
Sadly, this is not exactly a novel situation for Nigeria. Africa’s largest crude oil producer has been feeling the pinch for some time, watching its unsold cargoes piling up in port for want of buyers.
Just over a month ago, for example, it found itselfinthepositionofseekingwaystounloadno less than 50 cargoes, including 35 April-loading shipments and 15 more left over from its March programme.
Since then, Abuja has tried to drum up inter- est by offering price cuts. It slashed prices for Bonny Light and Qua Iboe, two high-value light sweet crudes, bringing the two grades down to $3.29 and $3.10 below Brent, respectively.
But the discounts have failed. Instead, the overhang has continued, with European refin- eries (usually the main customers for Nige- rian production) ramping down purchases in response to sluggish fuel demand. Reuters reported on April 16 that Nigerian National Petroleum Corp. (NNPC) had yet to find buy- ers for 60 crude cargoes. The following day, Bloomberg quoted traders as saying that Nigeria accounted for the vast majority of West African production that remained unsold, including 10mn barrels of April-loading crude and 60mn barrels of May-loading crude.
Spencer Welch, a director at IHS Markit’s oil markets and downstream team, pointed out that
these unclaimed cargoes represented a heavy burden for Nigeria, which does not have ade- quate storage capacity. “That seems to be the first real point of a bust, with no onshore storage, so it hastogoontoships,”hetoldBloomberg.
Olivier Jakob, the managing director of Petro- matrix, pointed out last week that Nigeria’s woes were not exactly unique. “[Oil] has nowhere to go,” he remarked, according to Bloomberg. “It’s really a problem of demand. It’s not just affecting the supply from West Africa. I think the North Sea is also problematic, and the [Mediterranean supply] is at a heavy discount.”
Contrasting sentiments
Even so, the country’s situation seems particu- larly dismal in light of upbeat remarks made by officials in Abuja.
On April 18, Mele Kyari, the group managing director of NNPC, told Nigeria’s Premium Times that he expected the market to stabilise before long. He acknowledged that Bonny Light prices had sunk to a low of $12 per barrel the day before but declared that he remained confident. Indeed, he argued that the price quoted for Bonny Light appeared artificially low because it included a discount of $4 per barrel.
He also asserted that the new OPEC+ agree- ment was sure to lend oil some momentum.
“This [price of $12 for Bonny Light] is the market reality today after the recent output cut by OPEC+,” he said. “But I am optimistic it will reboundwiththesupplycut.”
Not enough
As of press time, no such rebound seems to be happening. This is not good news for Nigeria, as it means that the country is not earning enough to recover production costs, which reportedly average around $22 per barrel, or guarantee its ability to meet budget targets, which assume that oil prices will average $30 per barrel this year. (And it is certainly not enough to allow the coun- try to reach its fiscal break-even level, estimated by the Fitch Ratings agency at $133 per barrel.)
Under these circumstances, the West Afri- can country’s best option may be to work harder to convince market observers that the OPEC+ production cuts have a chance of reducing global supply gluts. That is, it may have to break from its long-standing practice of never quite complying with output quotas, despite pledges to do so.
Even if Nigeria succeeds on this front, though, it cannot turn the tide alone. It will also need the help of its fellow OPEC members and the other adherents to the OPEC+ agreement. ™
Nigeria is not earning enough to recover its production costs, which reportedly average around $22 per barrel
P6
w w w . N E W S B A S E . c o m Week 16 23•April•2020