Oil & Energy
‘Why Nigerian Oil Prices Are Falling’
Although it is a very rare occurrence to see Nigerian grades trade at levels stipulated by the Nigerian National Petroleum Company (NNPC) every month, the issuance of its official selling prices generally reflects the market’s current sentiment. Today’s current feeling about Nigerian crudes (and Western African ones generally) is that of weakness. Attesting to the difficulty of placing West African cargoes recently it should be noted that up until mid-April roughly half of May 2021 loaders were still available, normally the overwhelming majority of them would be cleared by that point surely. In this article, we assess 3 main trends that have brought Nigerian crudes to the low point at which they are now, fierce competition from usual rivals and incrementally from US cargoes, the tepid recovery of European markets and the sudden collapse of India.
But let’s first take a look at NNPC’s official selling prices for May 2021. If one is to disregard the April-June 2020 period that saw every possible differential plummet to multi-year lows, the new Nigerian OSPs for May plummeted to their lowest in more than a decade. NNPC dropped its main export streams, Bonny Light, Brass River, Erha, Qua Iboe – by 61-62 cents per barrel from their April 2021 prices, with them amounting to -0.9, -0.8, -0.65, -0.97 USD per barrel against Dated Brent. As low as this might seem, these levels are some 40-50 cents per barrel better than the actual May spot market. It was inevitable that May OSPs decrease given that aggregate exports are inching back (to 1.68mbpd next month), however, the extent of the slump was aggravated by the below factors.
The OPEC+ years have brought about an unprecedented expansion of light sweet crudes available to buyers, refiners across continents can choose from a plethora of options. Most of oil-producing nations are gradually increasing their output, be it a consequence of easing OPEC+ quotas or simply due to their own volition to benefit from the reasonably profitable prices above 60 USD per barrel, meaning that refiners in Asia or Europe can create complex strategies on what to refine in the upcoming period. Now that the market has been backwardated for several months already, the shipping market no longer experiences any dearth of vessels, i.e. freight costs would be manageable for the buyers. Thus Nigeria, located mid-way between Europe and Asia (and having largely lost the US crude market), is compelled to fend off competitors from all sides.
April 2021 will witness a solid inflow of light sweet US grades to Asia, amassing a monthly total of 44MMbbls. That is some 10MMbbls higher month-on-month than in maintenance-heavy March. Concurrently, WTI delivered to Singapore fell to its lowest in a year, flirting the 0 line of Dated Brent in mid-April; WTI DES Rotterdam plunged into negative territory in the first days of April and has remained there ever since. Similarly, in Europe where both Azeri and CPC saw a massive depreciation, the former fell as low as 0.10 USD per barrel vs Dated (generally should garner a premium of 1-2 USD per barrel), whilst the Kazakhstani flagship grade nosedived to -3.25/-3.50 USD per barrel against Dated Brent. Thus, Nigeria’s rivals are pumping crudes onto the markets and accepting anaemic differentials as a necessary albeit painful element of the trading game.
India has routinely been the top buyer of Nigerian grades, the not-too-light and not-too-heavy quality of Nigeria’s flagship crudes suits India’s plentiful refiners almost perfectly. Last year 17% of Nigerian crude exports went to India, equivalent to 300kbpd on an annual average basis. Nigerian oil producers will have an extremely tough time trying to maintain those levels of crude exports. First the ever-widening Brent/Dubai EFS has narrowed down arbitrage potential from Nigeria, which, at a time of increasing export quotas (went from 1.64mbpd in February 2021 to 1.68mbpd in April) was a rather unpleasant development.
India’s current COVID travails foreshadow further difficulty for placing Nigerian cargoes in their prime market outlet. National demand for transportation fuels is bound to drop by at least 20% in April in India as regional governments introduced lockdowns once again, including the capital New Delhi. Although initially destined for several weeks, the lockdowns can be extended for a couple of months as the dangers of the new Covid strain discovered in India, labelled B.1.617, are still difficult to assess. One thing we can ascertain already: throughout December 2020 –March 2021 oil producers from Nigeria loaded an average of 11-12 MMbbls. This April the total volume to be loaded in Nigerian terminals towars India will amount to 8.8 MMbbls and May 2021 is bound to decrease even further.
Spanish refiners have routinely been to the lighter side of the Mediterranean spectrum, therefore it should not come as a surprise that Spain maintained its role as an important buyer of Nigerian crudes (0.23mbpd), trailing only to India. On the back of Europe still struggling to revive its economy at least to pre-COVID levels, Spain has been suffering from depressed demand. Coastal refiners have felt the pinch of the ongoing market slump more than landlocked ones did, unfortunately for Spain all but one of its refineries are located next to the Mediterranean and Atlantic Ocean, thus being subject to the intense regional competition. Most coastal refineries have been running at 60-70% nominal capacity for almost a year. Truth be told, even the only inland refinery in Puertollano has shut down all fuels production in April 2021.
At the same time, during the autumn months of 2020 when the 2nd wave of COVID was battering Spain again, Nigerian exports stayed within the statistical average all the while differentials were stronger than they are now. In March 2021, only one Escravos Suezmax cargo left the loading terminals of Nigeria for Spain; all this after a really robust February when a total of 9.2MMbbls was loaded. This harkens back to the above-mentioned competition with US, Caspian and North African grades, a joust that Nigeria is evidently losing. Weak demand and third-wave lockdowns notwithstanding, neither the American WTI nor the Caspian CPC has seen any ground-breaking changes in total volumes loaded en route to Spain.
Katona writes for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.