Last week, Saudi Aramco, the world’s largest oil exporter, lowered the pricing terms for its Arab Light sold to Asia. The development comes at a time refineries are dealing with falling margins and the global oversupply of oil. Chineme Okafor in this report examines the impact of this development on Nigeria, a country already in serious economic downturn
Saudi Arabia’s state-owned oil company, Saudi Aramco, announced a week ago that it would sell cargoes of its Arab Light in September at $1.10 per barrel below Asia’s regional benchmark.
This brutal market shares strategy leaves Nigeria, especially, and other oil producers with a sudden market-related challenge to deal with. As it is, Nigeria will have to immediately find alternatives to mitigate this challenge or risk losing its share of these market routes.
At the moment, one of the routes, Asia is one of Nigeria’s reliable trade destination besides Europe. The United States used to be on top, but the country has since lost it.
The pricing cut which a Bloomberg data said was $1.30 from August, represents a market share battle between Saudi Arabia and other member countries of the Organisation of Petroleum Exporting Countries (OPEC), and particularly Iran which is ramping up its crude oil exports after sanctions on it were eased in January.
As it is known, Saudi Arabia earlier inspired a decision by OPEC to maintain production levels to drive out higher-cost producers like drillers in the US. It however indicated with the price cut, that there is a new fight for market share, one that some OPEC members may find it quite difficult to cope with.
Data compiled by Bloomberg also stated that the price cut was the biggest drop since November 2015, and a continuous attempt by producers for Asian customers, mostly independent refineries in Singapore; China; and South Korea that are cutting operating rates following a slump in their margins and rising supply from state-owned companies like China Petroleum and Chemical Corp.
The Bloomberg data also mentioned that in China for example, independent refiners are already operating at less than half their capacity, indicating a shrink in supply outlets.
In many ways, the development would impact on Nigeria’s take from oil. It could first induce a large crude inventories again from what have built up over the past two years of low prices. It will also push Iran to take similar measure to match Saudi’s market challenge. Anyway, Nigeria may not be in a very comfortable position to deal with this particularly in the long run.
Aramco raised the pricing of all grades except its Extra Light to Northwest Europe and the Mediterranean, it however reduced its official selling prices for Asian clients, with the biggest cut being $1.60 for Extra Light crude. It also ensured that pricing for its Light and Extra Light grades for clients in the United States were cut by 20 cents and 40 cents respectively, while the Medium and Heavy grades were unchanged.
On that development, oil prices have dropped below $40 per barrel in New York for the first time since April. Expectedly, the drop was based on concern that the global supply glut was about to return.
Also based on supply disruptions from Nigeria and Canada earlier in the year, the Brent crude which had climbed 14 per cent, even though prices were still 20 per cent lower than it was in the past year, was beginning to see some movements.
Tough Time for Nigeria
Industry analysts who have examined the development indicated that this puts Nigeria on a very tough turf at a time it has so much internal production challenges to deal with.
According to them, it means Nigeria would have to either offer discounts on her grades to its customers on that same route to be able to secure its market share, or find other means to address Saudi Arabia’s strategy.
Either way or strategy the country adopts will result to lower revenue for the government, especially at a time the country’s production is unstable following resumed militancy in the Niger Delta.
They declared that any price reduction in Saudi Arabia’s grades had huge impacts on crude oil sales across the globe. According to them, Nigeria has a bulk of its oil going to Asia and Europe, but with less competition for market share in Europe.
The competition, they noted resided in Asia and America, the two destinations Saudi Arabia has taken strategic market decisions on, thus making it unavoidable for Nigeria to devise a counter strategy against the Saudis.
The Nigerian National Petroleum Corporation (NNPC) could not be reached for a response on what options it could be considering on this, however, reports from Reuters showed that August bookings from Nigeria and other West African producers to Asia has dropped.
The Reuters report indicated that all in all, booking from Asia was already in question because refinery had lost margins from a growing excess of refined products. It explained that there was a significantly big difference from a year earlier in bookings made for India, due in part to the unpredictability of Nigerian oil loadings.
It said on the strength of a fierce Saudi-inspired competition; shaky demands; and disruptions in Nigerian loadings, at least one cargo loading has been cancelled, while a total of 55 cargoes for 1.685 million barrels per day (bpd) were booked to sail to Asia in August.
The total, Reuters said, was just below two per cent lower than the planned bookings in July, and more than eight per cent lower than that of August 2015.
Similarly, the Managing Director of Seplat Petroleum Development Company Plc, Mr. Austin Avuru, in Lagos warned that crisis in the Niger Delta was beginning to weigh in heavily on Nigeria’s oil and gas industry.
Avuru spoke at the opening session of the 2016 Nigeria Annual International Conference and Exhibition (NAICE) of the Society of Petroleum Engineers (SPE), and said about 70 per cent of oil and gas production in the region were locked in from the traditional onshore and shallow water terrain.
He noted his optimism that production could fire up by 2020, adding however that he was not aware of any real solution to end the crisis in the Delta soon.
“A year ago, we were battling with the drop in crude oil prices. Today, we are battling with zero production; zero revenue and zero everything. For upwards of five to six months, some companies operating in Nigeria have not been producing.
“Some of us no longer check the oil price; it has become irrelevant. Oil price is only relevant when you produce,” Avuru explained.