The submersion of East Asian markets into coronavirus-induced
recession has pulled down several major oil producers, most notably
Nigeria whose breakeven price is well above $100 per barrel (Fitch puts
it at $144 per barrel). Depending on its crude production for 60% of
government revenue, Nigeria was confronted with a double whammy of
falling oil prices and general economic decline – to the extent that
Lagos has applied for some 7 billion in SARS-COV-2-related emergency
funds provided by the IMF and the World Bank. Nigeria’s credit ratings
were downgraded by both S&P and Fitch (Moody’s kept the negative
outlook without downgrading) and things seemed as if the most populous
country in Africa might be in for some serious trouble.
Part of
the anxiety was due to the fact that Nigeria agreed to participate in
the unprecedented Russia-Saudi Arabia-United States crude production
curtailment and vowed to drop output levels by some 300kbpd to an
overall level of 1.4mbpd (do not be confused by the ostensibly higher
level of crude exports, Nigerian condensates are out of the question and
will remain left out from the deal itself). The Nigerian Oil Ministry
even went as far as to say that they expect 2.8 billion in additional
revenue from being part of the OPEC+ deal. Initially, however, whilst
Nigeria’s commitment to the deal entirely laudable, it seemed as if
OPEC+ was removing only a fraction of barrels that entered the market.
Graph 1. Nigeria’s Crude Exports in 2017-2020 (in million barrels per day).
Source: Thomson Reuters.
Now
Nigeria can finally let off a brief sigh of relief as the return of
China has boosted both export prospects and grade differentials. Led by
Saudi Arabia, leading Middle Eastern producers engaged in a
hypercompetitive price war and despite most of West African crudes
remaining one of the most optimal sources for IMO 2020-compliant
products, Nigerian crudes struggled to reach their traditional market
outlets in Asia. The intense price pressure has rendered West African
remarkably attractive after it drove them to multi-year lows – even IMO
2020 favorites like the Equitorial-Guinean Zafiro or Chadian Doba went as low as -7 against Dated Brent, not to speak of the manifold light sweet grades West Africa wields.
Chinese buyers would generally buy only 1-2 cargoes from Nigeria yet
boosted by the economic profitability of West African countries in April
there were 4 vessels sailing off for China and the May 2020 tally went
even further to a whopping 7 cargoes, totaling 9 MMbbls. Interestingly,
both April and May witnessed an Egina cargo loading for China, despite
it being a staple diet of Northwest European refiners. This
reconfiguration of the usual state of things (albeit temporary) is
partially due to the fact that Indian demand, routinely the largest
magnet for Nigerian grades, has subsided somewhat as the
SARS-COV-2-induced lockdown took place there with a delay of several
months. All this means that Nigerian cargoes arriving to China this June
will mark the highest-ever level, whilst West African exports to China
will be the highest since November 2018. Related: Will There Be Another Oil Price War?
As
impressive as the Nigerian export surge to China seems, it would not
have happened without extremely depressed grade differentials. The
combination of Middle Eastern producers cutting OSPs and the coronavirus
demand slump has elicited an unprecedented drop in Nigerian
differentials – from March to April (the OSPs are usually published
around the 15th of the preceding months) almost every single
grade has witnessed a $4-5 per barrel month-on-month decline. Moreover,
differentials were plummeting even harder in terms of real market prices
(since OSPs play a largely indicative role) – after most flagship
Nigerian grades moved to discounts against Dated Brent in March, it took
them more than a month to bottom out in the $-7/-9 per barrel interval
to Dated.
Graph 2. West African Crude Exports to China in 2018-2020 (in million barrels per day).
Source: Thomson Reuters.
The
official selling prices of Nigerian grades present a fairly truthful
picture of their current pricing levels. If the OSPs of light sweet,
predominantly IMO 2020-compliant, Nigerian grades drop in May 2020 to
$-3 or even $-4 per barrel against Dated Brent, the lowest ever
recorded, then surely something is not right. Yet as the June OSPs start
to transpire one can see that a bounce back of differentials is already
taking place, Nigeria’s flagship export streams like Bonny Light or Qua
Iboe are both assessed at $-1.05 per barrel to Dated, with the rest
moving even stronger towards a flat Brent assessment. As Europe comes
back from a multi-month lockdown season, it will rediscover its appetite
for West African crudes, hence the probability of the Nigerian export
surge to China becoming a long-term trend (especially with the
strengthening diffs) is shrinking.
Graph 3. Nigerian Official Selling Prices in 2017-2020 (against Dated Brent).
Source: NNPC.
Nigeria’s
way forward will not be easy – its exports possibilities will be
subdued for a couple of months by its participation in OPEC+, all its
differentials will not go back to pre-corona territory that easily. This
will be especially true of high-gasoline-yield very light grades,
whilst grades with a more balanced mid-distillate yield should become
the best performers of this summer. Nigerian exporters would also need
to keep in mind the risk of increased competition – to name just one
example, the Indian refiner IOC has awarded in a recent purchase tender
in May to the American WTI although almost everyone expected it to buy
Nigerian.
By Viktor Katona for Oilprice.com
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