The demand for crude oil, the mainstay of Nigeria’s economy has gone on all-time low due to the Coronavirus pandemic and this has called for the question on how the country will survive without revenues from the sale of crude oil.
On Monday, the price of crude oil in United States, the largest consumer of oil, turned negative for the first time in history as the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 a barrel.
According to the BBC report, the implication of this is that oil producers like Nigeria are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May.
Quoting Energy Equity Analyst, Stewart Glickman, “the demand shock was so massive that it’s overwhelmed anything that people could have expected.
“The severe drop on Monday was driven in part by a technicality of the global oil market. Oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs.
“June prices for WTI were also down, but trading at above $20 per barrel. Meanwhile, Brent Crude – the benchmark used by Europe and the rest of the world, which is already trading based on June contracts – was also weaker, down 8.9% at less than $26 a barrel.
Glickman said the historic reversal in pricing was a reminder of the strains facing the oil market and warned that June prices could also fall, if lockdowns remain in place. “I’m really not optimistic about the prospects for oil companies or oil prices,” he said.
How Oil Market is Killing Nigeria.
Nigeria depends on crude sales for half of government revenues and 90% of foreign exchange earnings.
While Nigeria’s plight is playing out across the world, with actual oil cargoes often trading at huge discounts to headline futures, the pain is particularly acute for Africa’s biggest economy because of its oil dependence and an inability to store.
According to IHS Markit, Nigeria would run out of storage space quickly if it couldn’t find ships to take its oil.
Bloomberg quoted traders monitoring the West African market as saying that one of Nigeria’s benchmark grades, Bonny Light, fell to about $12 or $13 a barrel this week. Also, Swathes of Europe, the staple market for the West African nation, have gone into lockdown to combat the coronavirus.
Even with prices deeply depressed though, long-haul buyers in Asia don’t want cargoes because there’s also freight to pay and no real need for the barrels since demand has been obliterated. For Nigeria, that could become a particular challenge, since the country has very little space to store supplies if they’re unwanted.
“That seems to be the first real point of a bust, with no onshore storage, so it has to go onto ships,” said Spencer Welch, a director on the oil markets and downstream team at IHS Markit.
No Buyers for Nigeria’s Oil
Despite huge discounts, it has been reported that Nigerian oil isn’t clearing. The prices are well below the cost of producing oil in Nigeria — about $22 a barrel.
According to Global energy data, more than 50 million barrels of Nigerian crude oil for late April and May 2020 loading were still unsold, while the overhang is forcing down the value of the country’s crude oil
In a report on its website, Platts stated that Nigerian crudes, which are largely low in sulfur and yield a generous amount of diesel, jet fuel and gasoline, are finding it very difficult to attract interest from refiners.
“A lot of Nigerian crude is already floating on the seas and in storage tanks with no home and destination. Some sellers have no option but to continue to look to floating storage, even as freight rates remain at elevated levels,” S&P Global Platts stated.
According to Platts, the sheer weakness of the physical oil market can be best explained by the state of the Nigerian crude market, as the once-coveted light sweet Nigerian barrel is facing one of its toughest trading cycles, as refiners shun these crudes, even as they are trading at record-lows.
It noted that sellers were resorting to holding some of this oil on inland or floating storage, to hope to sell at a later date, when demand recovers.
Another reason for low demand for Nigerian oil, according to the company, had been that its main customers, Europe and India, have massively cut their refining runs. It said: “This overhang of Nigerian crude is possibly the largest ever in recent trading cycles, according to traders. This has pushed Nigerian crude values to record-lows and is weighing down on the already-depressed Atlantic Basin crude market.
