Amid the escalating oil price war between Saudi Arabia and Russia, Brent crude, the international benchmark, fell to $32 per barrel on Thursday after the United States banned travel from Europe to curtail the spread of coronavirus. The downturn in oil prices had been worsened by the threat of a flood of cheap supply as Saudi Arabia promised to raise output to a record high of 13 million barrels per day in its standoff with Russia.
Russia said on Tuesday that it could raise its oil production by 200,000 bpd to 300,000 bpd in the short term, with a potential for up to a total increase of 500,000 bpd. Traders have said Nigeria would have to heavily discount its crude oil as it found itself in a dog-eat-dog oil trading market. Brent, against which Nigeria’s oil is priced, dropped by $3.14 to $32.65 per barrel as of 6.05pm Nigerian time on Thursday, more than $25 lower than the country’s budget benchmark of $57 per barrel.
Oil prices plunged by as much as 30 per cent on Monday as Saudi Arabia launched a price war after the Organisation of Petroleum Exporting Countries and its allies failed to agree to extend their production cuts. Brent crashed to $31 per barrel on Monday but recovered slightly to $37 on Tuesday. The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, noted on Wednesday that the country was already struggling to find buyers for its crude oil, saying over 50 cargoes are yet to be sold.
The unsold cargoes represented more than 70 per cent of the country’s total oil exports and puts the country in a very difficult spot, according to S&P Global Platts. Nigeria’s crude oil production stood at 1.74 million bpd in February, based on direct communication, according to OPEC’s latest monthly report released on Wednesday. Traders were quoted as saying that the NNPC would have no option but to push down prices for its crudes in the coming weeks and months to clear the overhang.
“Saudi is the cheapest barrel on earth at the moment and West African crudes (Nigeria, Angola) have to discount to compete with sour barrels,” a trader said. Bonny Light, Nigeria’s reference crude oil grade, was assessed at a premium of 50 cents per barrel to Dated Brent on Wednesday, its lowest level since October 28 last year, Platts data showed.
Kyari said Nigeria’s crude cargoes had been stranded due to the higher selling price compared with its fellow OPEC members like Saudi Arabia and Iraq, which could afford to offer discounts of around $5-$8 per barrel to buyers. When contacted, the acting Group General Manager, Group Public Affairs Division, NNPC, Mr Samson Makoji, told our correspondent that the corporation was studying the current realities in the oil market.
“We don’t normally hurry into taking actions at a time like this. We are studying this situation carefully and whatever strategy that we will adopt will be in the best interest of this country,” he said. Nigeria’s crude oil is light and sweet; low in sulfur and yields a generous amount of diesel, jet fuel and petrol, which are the most profitable products for global refineries. These crudes also normally command a significant premium over Dated Brent.
But in a well-supplied market, refiners have a lot of choice, and buyers are scrambling for the cheaper sour barrels rather than the more expensive sweeter barrels, according to S&P Global Platts. Trading sources said these unsold crude cargoes included some that had already loaded and were floating toward Europe without buyers, alongside others set to load in March and April that were struggling to find homes. The quantity of unsold oil loading in March and April is somewhere between 50 million to 60 million barrels over this period, according to Platts estimates.
“Nobody is buying, and [Brent] structure is not deep enough to store. The lack of demand had put downward pressure on prices, and this was intensified by the drop seen in global crude prices over recent days,” a trader said. The outlook had worsened further with a spike in the cost of freight Tuesday and Wednesday, according to sources. “Differentials could be hit by several Dollars; I think Bonny Light is [close to being] in negative territory,” another trader said.