End Of Days As Crude Price Collapses

Brent crude the international oil price benchmark and the basis which Nigeria uses for price discovery on its crude grades fell to $22 per barrel on Monday,

its lowest level in 18 years .  Such a price if it persists for a short while will mean that Nigeria will have no option other than to shut in production.  Given that in order to find buyers, crude will have to be offered at a discount to this benchmark, the business becomes unprofitable. The Nigerian National Petroleum Corporation (NNPC) was reported on Monday to have cut its April official selling prices for Bonny Light and Qua Iboe, two of the its major grades, by $5 per barrel to dated Brent minus $3.29 and minus $3.10 per barrel, respectively. The price reflects the desperation to cajole Traders in a stringent buyers market and also represents a first in NNPC OSP pricing history.

Most producers are offloading their oil for below $20 per barrel as the double whammy of coronavirus pandemic demand destruction and global oversupply  amid an action by  Saudi Arabia and Russian.  Last week, Russia got as little as $18 per barrel for its benchmark export grade  Urals while Saudi Arabia was selling its Arab Light in Europe for $16, according to Reuters calculations based on official Saudi prices and Urals deals. OPEC said on Thursday its daily basket oil price fell to $16.87 a barrel on April 1, down from $22.61 the previous day.

Whilst crude grade across the board have been hit, light sweet grades  have borne the burden. These  grades with low density and low sulphur are mostly used to make transport fuels  whose demand has crashed and are also hard to store for long.  Nigeria produces only light sweet grades which makes it almost impossible to secure market share. It creates a bleak outlook for the country, more so since the median cost of production in Nigeria is about $20 per barrel.

The Nigerian Minister of State for Petroleum Resources has suggested that the policy would be to ramp up production to as much as 2.3 million barrels a day to compensate for the fall in the oil price. That policy seems misguided as realistically Nigeria posses very little excess capacity if any and to whom will this oil be sold. Analyst estimate that demand has contracted by about 25 million barrels a day, inventories are also at an all time high as refiners cut back refining runs. The implications of shutting in production are egregious.

Take Nigerian Petroleum Development Co. (NPDC) for example, the E&P subsidiary of NNPC and the cash cow whose revenue sustains the existence of NNPC  as a solvent entity. Shutting in production is complicated, comes with risks and has costs. It is also represents a victory for Saudi policy as the secure the market. Add to that oil  price volatility and the uncertainty it provokes and there are seemingly no easy or good options for the Nigerian oil industry

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Normally, we used to discuss cargoes at bid versus offer spreads of around 10 to 20 cents for several weeks before we closed a deal. Now, we have bid versus offer spreads of $2 to £3 a barrel and they’re done immediately,” one trader at a major refining firm was quoted as saying.