Bonny Light The Price is Right

Bonny Light the most recognisable and one of the most sought after Nigerian crude grades last week  traded at $12 per barrel.  The low sweet flagship Nigerian crude had up until last month

historically traded at a premium to dated Brent. Bonny Light has become emblematic of the fate of light sweet crude grades that yield high cuts of transport fuels in a world in lockdowns.

It would also appear the published price discovery apparatus has been subsumed by a market in turmoil. This can only be described as a  disconnect between S&P Platts Global methodology on close and real market activity. Brent crude headline oil futures closed at $28 on the ICE on Tuesday , yet in the physical market according to traders it was fetching  only about $18.10 a barrel on Wednesday, and Bonny Light was trading at a discount of $5.70 less.

It was inevitable that given the scale of oversupply the market was going to enter the sort of super-cantango it is now  experiencing  with producers having to sell at aggressive discounts as more crude enters the market. The term structure of all crude benchmarks moved to a super contango in March, as massive oil demand destruction, significant refinery cuts and rising global oil supply  created a large surplus in the oil market. This has pushed  prompt prices to decline much lower compared to longer-dated contracts, steepening the forward curve at the front end. In the futures market, the nearest Brent contract is for June, which is about $3 cheaper than July. But with April barrels still available, those need to price at even deeper discounts in a race to the bottom to find buyers.

The super contango provokes  a similar response  as entering a deflationary spiral,  where buyers  hold off on purchasing crude waiting for the bottom of the market. Nigeria's position is made worse

because it has virtually  no storage capacity and no operating Refineries.  It has no capacity to refine the crude it produces for domestic consumption. Nigeria could continue to produce and store cargoes on tankers offshore to capture the contango. It is risky proposition because nobody can really gauge when COVID-19 might pass and the time it will take for economies to rebound.  

The boss of the national oil company NNPC, Mallam Mele Kyari said  recently that Nigeria would be effectively out of the oil business  at $20 per barrel, yet neither he nor  the Oil Minister Chief Timipre Sylva have articulated Nigeria's policy  on what strategy Nigeria will adopt. A few weeks ago the decision was made to continue production at full tilt, but without buyers it seems pure folly.  Many of Nigerias customers have simply suspended or reduced oil purchases. Indeed several Indian refineries, including IOC, BPCL and HPCL, reduced run rates and said they are not making any large purchase commitments because of weak demand and Reliance even offered cargoes   [April ], which would have been sold  at a  huge loss.

The Oil Minister Chief Timipre Sylva confounded the market in the wake of the recent OPEC+ agreement by boldly predicting  it would boost the oil price by $15 a barrel. It could be that he was confusing himself by  indulging in some sort of Hegelian dialectic on  oil market pricing. More likely and perhaps more characteristically he was demonstrating the lack of nous which is an ubiquitous feature of Nigerian oil policy decision making. If that were not enough he subsequently announced an oil block bid round scheduled for the next fortnight. On the face of it such a bid round seems a desperate attempt to create revenues to bolster declining crude oil  receipts. The reality is that if it were the governments sole intention to choose the worst possible time to hold a bid round they could not have done better.

There are difficult times ahead for Nigeria with few good options. The hope has to be that COVID-19 swiftly abates and global economies begin to rebound as they reverse lockdowns. The naira will come under increasing pressure as oil receipts slump. Nigeria is experiencing a crisis of a generation  brought on by a global pandemic but made worse by years of ineptitude, greed and corrupti