LIBYAN LIGHT SWEET CRUDE BAD NEWS FOR QUA IBOE AND BONNY LIGHT
The return of Libyan crudes, notably EsSider and Saharan which will largely clear in the Mediterranean at prices that will be competitive against long-haul grades, will put Nigerian grades under severe pressure.
The return of Libyan crude has come at the worse possible time as Nigeria scrambles to find homes for its many distressed cargoes.In Recent times a significant proportion of Nigeria's barrels have been finding their way into Europe, that now seems set to cease.
Libya's crude and condensate output has more than quintupled over the past month, averaging close to 600,000 bpd this week, according to Platts estimates. The State owned oil company has forecast production of 1 million barrels per day by the 3rd decade of November.
In a recently published research note S& P Platt Global identified US and Nigerian crudes as being the most vulnerable to the return of Libyan light sweet exports.
Nigeria has already steeply discounted its key export grades against the Brent oil market benchmark. In an attempt to force barrels into Europe, Nigeria has also significantly lowered OSPs (Official Selling Prices are grade premiums) for both Bonny Light and Qua Iboe and about 20 of the 26 grades it produces. Yet there are still an increasing number of unsold cargoes being pushed into storage.
The outlook for the European oil market has turned very bleak with a COVIDresurgences set to eviscerate demand. This black swan event has laid bare a weakness in Nigerian crude oil policy decision making that has sat like an elephant in the room for many years. Nigeria really needs to reconsider how it sells its own equity crude oil. In a presentation I made to NNPC in 2007 I forcefully made the argument that targeting specific customers in the growth economies of the Far East would create a more resilient market for Nigerian crude . I suggested a policy mix of netbacks for specific grades and variable freight adjusted Official Selling Prices (OSPs). It has been clear to many commentators over a very long period that in an oversupplied market all prices will trend permanently lower. In what is now a saturated market the only real support for crude prices is the efficiency of low cost producers or market manipulation by pools of dark money looking for yield. Creating customers provides the basis for a mutually beneficial outcome where sensible negotiations create sustainable market share. Otherwise it is impossible for a country that produces oil at $35 per barrel for long haul markets to stay in business.
NNPC current policy decision making is predicated on the notion that there will be a post-COVID-19 restoration and prices will rebound and that oil will still be a valuable commodity in 50 years time. I think it is unlikely we will see $60 oil in 2021 or again despite Goldman Sach's prediction of $65 barrels. Setting aside the fact that such a price would put shale producers firmly back in the market, the COVID catalyst has not just cratered demand but also accelerated the renewable energy footprint.
Any future global demand growth will come from the Asian market with China and India creating the increased demand. Angola who have adopted the strategy of supplying these markets with their crude grades are not experiencing the problem Nigeria is having selling its crudes. More than two thirds of Angola's cargoes are shipped to China compared to about 5% of Nigeria's.
It is difficult to see where Nigerian grades will find regular homes. Europe and the Atlantic basin seem closed, China and the Far East are increasingly being supplied by Russia, the Saudi's, Iraq and Iran. NNPC have vowed to slash the price of production to $10 per barrel in 2021, some would say an impossible target, but to stay in the oil business it is a target that must be achieved and one which is under the complete control of Nigeria.