Page 5 - AfrOil Week 16 2020

AfrOil COMMENTARY AfrOil
 Since then, Abuja has tried to drum up interest 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, BloombergquotedtradersassayingthatNigeria 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 adequate storage capacity. “That seems to be the first real point of a bust, with no onshore storage, so it has to go onto ships,” he told Bloomberg.
Olivier Jakob, the managing director of Petromatrix, pointed out last week that Nige- ria’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 confi- dent. 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 mar- ket 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 country to reach its fiscal break-even level, estimated by the Fitch Ratings agency at $133 per barrel.)
Under these circumstances, the West African country’s best option may be to work harder to convince market observers that the OPEC+ pro- duction cuts have a chance of reducing global supply gluts. That is, it may have to break from its long-standing practice of never quite comply- ing 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.™
“ earning enough
to recover its production costs, which reportedly average around $22 per barrel
Examining the WTI collapse
The unprecedented crash stems from the mechanics of futures contracts and an oversupply crisis
WHAT:
WTI prices closed at -$37.63 on April 20.
WHY:
Traders rushed to exit an expiring futures contract.
WHAT NEXT:
The underlying problems will still be in play by the time the next futures contract expires.
US oil prices have recovered slightly from an unprecedented collapse into negative territory onApril20,butWestTexasIntermediate(WTI) continues to trade at lows not seen since 1986 amid warnings that the crisis is set to worsen.
In the April 20 crash, WTI crude futures for May delivery plummeted 305% to settle at -$37.63 compared with $18.27 on April 17 – the previous day of trading, as April 20 fell on a Monday.
The rapid collapse has been primarily attrib- uted to the mechanics of futures contracts as the May contract came up for expiry on April 21. Despite some recovery, the new front month contract for June is also taking a hit now, and
other benchmarks including Brent are also feel- ing the impact.
Withnoneoftheissuesthatprecipitatedthe crash likely to be resolved anytime soon, the April 20 collapse is now being held up as a sign of much worse to come as remaining available oil storage capacity fills up.
Contract killer
The market for physical barrels is not yet faring as badly as the WTI drop into negative territory would suggest at first glance. It does, however, illustrate how a combination of forces is putting immense pressure on oil prices, and will con- tinue to do so.

Nigeria is not
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