- June 25, 2021
- Posted by: Manuels Effe
- Categories: covid-19 Updates, Insight, News
Oil prices are insignificant rebound since the onset of the COVID-19 pandemic as demand and supply are recovering at an unequal speed. But Nigeria is faced with increasing Premium Motor Spirit (PMS) subsidy and crude sale challenges.
International crude oil benchmark, Brent had traded at $73.17, gaining $0.48 on Monday while the United States West Texas Intermediate traded at $71.21, recording a $0.30 gain. Brent continues to rise steadily as demand picked up in the US and Europe and lockdowns and flight restrictions ease. This is expected to continue as vaccine rollouts increasingly gain more coverage across the globe. Markets are said already to be pricing in a recovery in the demand for jet fuel by summer as more airlines globally are announcing the resumption of international flights.
US bank Goldman Sachs’ recent claim in a note to clients further heightened the hopes when it stated that current global dynamics have unleashed pent-up travel demand due to the rollout of vaccinations in Europe and parts of the developing world and would go further to spark “the biggest jump in oil demand ever, a 5.2 million barrels per day (bpd) rise over the next six months”. The volume of new demand will be unable to be matched by immediate increases in supply. The bank, at the start of March, had forecasted a rise in Brent 10 Crude prices to hit $80pb by the third quarter of this year, indicating, however, that there will be lower interest rates globally as central banks in many advanced economies try to support economic recovery with a weaker US dollar and prop up global commodity prices in the coming months.
While for the undiscerning, all these are hope-raising for Nigeria in terms of revenue accrual, external reserve growth, the balance of payments, enhanced exchange rate, confidence renewal for foreign investors that had been put out by persisting forex liquidity crisis, and the challenged macroeconomic status, petrol subsidy, crude production and sale problems badly now confronting the country could rob her of the promising gains.
The country’s long-term oil production target of four million barrels a day had remained stuck between 1.5 million and two million barrels daily with oil majors refusing to invest due largely to the non-passage of the petroleum industry bill. The bill has been tied down in the National Assembly by political intrigues for over a decade, just as the Department of Petroleum Resources (DPR), until its latest bid round, last held one in 2003 even though it has been having bilateral agreements with varying parties.
Until now, the covid-19 pandemic has been the biggest factor affecting the oil price outlook. Much as recent improvement in prices is heartwarming for the market and oil-producing countries, there is worrying concern over the unbaiting surge in India covid-19 cases as well as those of Brazil and Japan, where the cases are also on the rise, clear that if the trend continues in those countries as they have been, they could wipe out as much as 350,000bpd in global oil demand.
India is not only the world’s third-largest importer of oil but Nigeria’s highest importer at the moment. India’s COVID-19 situation is shrouded in uncertainty amid stringent regional lockdowns and weak domestic consumption, making Nigerian crude variants begin to seek other buyers in Asia and Europe. S&P Global Platts had reported that most Nigerian crudes were trading at close to 12-month lows. The country’s flagship-grade, Bonny Light was last assessed at Dated Brent minus $0.8 per barrel, up from a recent low of minus $0.95 per barrel, but still close to the weakest it has been since May 2020.
Akpo condensate, normally a preferred grade for Indian refiners, was last assessed at Dated Brent -$2.10 per barrel, its lowest level since September 2020.
The Indian Oil Corporation (IOC) last bought crude loading mid-to-late June in a tender that closed April 15, as S&P Global Platts reported. The refiner had since cut run rates across its refineries to an average of 88 percent, company officials reportedly said on May 12.
The run rate across its nine refineries was 99 to 98 percent in the first half of April.
“Three weeks without IOC weighs dramatically on Nigeria. It is the biggest Nigerian grades buyer,” a trader said to S&P Global Platts. IOC skipped the last decade of June loading window and now seems to have skipped July 1-10 also,” a second trader was quoted as saying.
India’s state-owned refiners typically issue tenders for a large proportion of their crude requirements, but with the latest wave of COVID-19 infections in the country still raging, no new tender had been issued since late April, S&P Global Platts further disclosed.
Refiners such as Indian Oil Corporation, Hindustan Petroleum Corp Ltd, and Bharat Petroleum Corp Ltd usually buy significant amounts of Middle Eastern and West African crudes through regular tenders.
The last such buy tender was awarded by HPCL was on April 23 for crude loading from West Africa in early June, according to S&P Global Platts data, though some of IOC’s recent purchases included Nigeria’s Agbami, Akpo, Bonny Light, and Forcados, as well as Gabon’s Oguendjo.
Besides, even if the country is able to make more sales and earn good revenue in the unfolding oil price rebound, the high subsidy payment on its fuel needs would make nonsense of its earnings.
The government’s attempt to embark on complete price deregulation of the downstream sector of the oil industry had been resisted by labour, who is insisting that government-owned refineries be rehabilitated first before it is done. But Nigerian National Petroleum Corporation (NNPC) had argued that the average landing cost of PMS in March 2021 was N184 per litre as against the prevailing landing cost of N128 per litre and a retail price of N162-165 per litre. The cost-reflective price should be a minimum of N212 per litre based on recent global oil prices and the prevailing exchange rate of N379/$, among other factors.
The NNPC reportedly spends over N120billion monthly subsidising fuel, an act that is unsustainable. Government revenue is faced with uncertainty under the crushing weight of fuel subsidy with NNPC stating recently that it won’t make remittances to the Federal Accounts Allocation Committee (FAAC) for April and May after accounting for fuel subsidy payments from its revenue.
As subsidies become a major drain on Nigeria’s financial resources and Government is unable to phase them out, if oil prices continue to go higher, it would be impossible for many states to pay their workers in the coming months.
NNPC is, however, hoping for relief in the Dangote Group’s soon-to-be-completed refinery, convinced that it could mitigate the country’s fuel imports as its recent announcement of its intention to acquire a 20% stake in the refinery aligns with its import reduction objective.