The prices of Nigeria’s crude oil grades have recorded significant decline over the last two weeks, fuelling concerns over the ability of the country to meet its revenue target and fund its budget. This was even as shipping companies have started hiking their price for the lifting of crude oil from Nigeria. Meanwhile, the call, weekend, by Lamido Sanusi, Emir of Kano and immediate past governor of the Central Bank of Nigeria, CBN, for the removal of fuel subsidy has continued to draw reactions from stakeholders and industry experts.
Data obtained, weekend, from Platts, a global energy information service, revealed that Nigeria’s crude oil grades had, over the last two weeks, dropped between 60 cents and 40 cents, the lowest in two months. According to the report, Nigeria’s flagship crude oil grade, Qua Iboe, was assessed at a premium to Dated Brent of $0.65 per barrel, the lowest since July 13, adding that the levels have dropped 60 cents from highs at the start of October, when the grade was assessed at Dated Brent plus $1.25 per barrel.
Brent oil, the benchmark crude, is currently trading at about $47.99 per barrel. In addition, the report stated that premium Nigerian grades, Bonny Light and Forcados have also dropped 50 cents since the beginning of October, while Bonny Light was assessed at Dated Brent plus $0.60 per barrel and Forcados also at Dated Brent plus $0.60 per barrel, the lowest since mid-August.
The report quoted oil traders as saying that the brief parity of all three grades at the end of last week had since disappeared, with Qua Iboe retaining a small premium over the other two. Differentials for Bonga grade had also dropped 50 cents since the beginning of October to Dated Brent plus $0.50 per barrel, while Escravos had dipped 40 cents to Dated Brent flat. Other Nigerian grades assessed by the report, Brass River, Erha, Usan, Agbami and Akpo, also had narrowing differentials.
Reasons for drop
The report attributed the drop in price to a number of factors including pressure from high freight rates, dampened European demand due to low refinery margins and competing Mediterranean grades. “As forward margins are on the way down and freight is holding at strong levels, European buyers are sitting on their hands,” one crude trader said.
Trading sources also stated that West African crude could begin to price into Europe this week, but falling differentials for competing light, sweet Mediterranean grades such as CPC and Azeri have made it more difficult. “The Mediterranean fall makes it even worse for residual light WAF,” said one trader of West African crude. The report said: “Additionally, in Europe, Urals discounts have grown to their widest in more than 16 months as a prolonged period of stagnant arbitrage and an overly long sour crude market in Europe made it increasingly difficult to clear volumes.
The Indian factor
“As a result, a number of European refineries are switching refining slates to heavier, sourer grades. India, which normally takes numerous monthly Nigerian cargoes, has also finished its buying for November, with the ongoing issue over the required ‘letter of comfort’ for ships loading from Nigeria still deterring some Indian buyers from loading additional crude.
“Despite some talk in the market about the US Gulf Coast and East Coast being potential buyers, traders in Europe said stronger buying interest has yet to be seen from the US. “However, as differentials continue to sink and compete favourably with domestic light sweet crudes, the US becomes a more likely region for remaining November barrels.”
NNPC’s LOC
Meanwhile, another Platts report also stated that at least two ship owners have asked for a premium on freight rates for ships loading crude oil out of Nigeria. The report, quoting shipping sources, stated that the two ship owners had started charging a premium of up to world scale 10 for ships loading from Nigeria because of Nigerian National Petroleum Corporation, NNPC, requirement that ship owners sign a letter of comfort that their vessels would not be used for illegal activities.
Shipping sources disclosed that if a ship owner was signing NNPC’s Letter of Comfort, LOC, he was liable for many risks and, therefore, he will charge a premium. Sources said the market had now accepted the letter of comfort, but it was causing unnecessary complications to an already oversupplied Nigerian crude market. According to the report, the SCF Altai, owned by Sovcomflot, was heard placed on subjects earlier this week to Repsol for November 12 loading dates at world scale 87.5 on a West Africa to Spain route, stating that at the time other fixtures for a Suezmax on a West Africa to Mediterranean route were being done at around Worldscale 77.5 and 80.
A representative of Sovcomflot said the ship was still on subjects at w87.50 but he declined to comment on the letter of comfort obligations it had agreed to. According to the ship owner, the agreement was still under discussion, and could not set a precedent for ships calling from Nigeria, as there was no fixed rule. Sources said a premium was also charged on the Suezmax Delta Kanaris chartered by Petrobras at world scale 87.5 on a Nigeria-Brazil voyage for November 8 loading.
Sources at Petrobras and Delta Tankers, owner of the tanker, were both unavailable for immediate comment. Trading and shipping sources said, however, that these cases were very rare so far and that it would not be common as every charterer has a different requirement, and not all ship owners may agree with them.
Subsidy removal
On Sanusi’s call for fuel subsidy removal, Mr. Frank Ihekwoaba, Chief Financial Officer, Eroton Exploration and Production Company Limited, said that fuel subsidy removal was in consonance with the realities of the time. He said: “The withdrawal of fuel subsidy is a shift towards financial markets, infrastructure spending and in conformity with present and future economic realities.
“I support government to scrap subsidy and hopefully channel the freed resource to massive infrastructure programmes.” Corroborating Ihekwoaba’s position, Managing Director, Petrocarbon Engineering Limited, an oil servicing company, Mr. Olisemeka Ojieh, said: “I support that subsidy should be removed. With this new administration, a lot of issues should be looked at critically. We should try to rethink and do things appropriately.
“More refineries should be built to create more jobs, block loopholes, instil transparency and remove the control of products distribution from the hands of few marketers.” On his part, the Chairman, Board of Trustees, BoT, Society of Petroleum Engineers, SPE, Nigeria, Mr. Alex Neyi, said: “We have always maintained that subsidy in Nigeria is not real because we know the mathematics of how it is been calculated.
“There is need for deregulation so as to allow market forces to play out. “The greatest challenge we have had to contend with is the idealism been passed on to the masses whenever they hear subsidy. “It is so bad that we allow ourselves to be fooled over what we literally are not enjoying.”
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