Nigerian crude sells at premium but weak output, high cost could hurt economy

Nigerian crude prices increased during the final trading session of the week due to rumors that Israel is preparing for a direct attack on Iran this weekend.

This marks the largest escalation of Middle East tensions since the Israel-Hamas conflict began last October. Nigeria’s Brass River and Qua Iboe traded near $93.89 per barrel while Brent Crude settled at $90.45 per barrel. However, such hasn’t translated into more income generation for Nigeria amid low production and high operating costs.

Approximately two thirds of Nigeria’s government revenue and 90% of its foreign exchange gains come from the country’s oil production.

Nigeria registered additional margins of $15.93 per barrel at the current price of $93,89 per barrel. The country’s 2024 budget was based on a price of $77.96 per barrel but producing significantly less than the benchmark of 1,78 million barrels per day hurt Nigeria’s economic prospects. Nigeria Bonny Light also traded at $93.54 per barrel on Friday.

Moderation in oil production

Nigeria’s production of crude oil fell for the second time this year, from 1.32 million barrels per day in February to 1.23 million barrels per day in March, according to data from the most recent monthly oil market report published by the Organization of Petroleum Exporting Countries (OPEC).

The most recent data also revealed that, in March, Libya produced roughly 1.24% more barrels per day than Nigeria, barely surpassing them. Saudi Arabia posted an average daily production of 8.97 million barrels—a decrease of 39,000 barrels—and maintained its position as the largest oil producer among OPEC members.

Over 50% of Nigeria’s planned May crude oil shipments haven’t been cleared, as unsold crude oil begins to accumulate in the oil market. Around 30 of the country’s cargoes need buyers, according to oil traders actively involved in West African crudes. Additionally, this suggests that in the upcoming month, at least 53 cargoes are expected to be loaded and depart Nigeria. One million barrels of crude oil each make up the bulk of the planned shipments, which is significant.

The demand for Nigerian oil has decreased due to extensive refinery maintenance in Europe, which has resulted in an excess of barrels being stored from April into the May trading cycle. Meanwhile, Angola is gaining ground in the Indian energy market.

Petrol subsidy in disguise

President Tinubu had already undertaken audacious reforms, such as eliminating an expensive gasoline subsidy and depreciating the naira twice in less than a year to revitalise the economy. However, rising inflation and heightened social unrest have compelled the FG to quietly implement some re-adjustments.

Nigeria’s only gasoline importer, NNPC Ltd., now depends on government subsidies to maintain reasonable pump prices. Nigeria has depended on petroleum imports for almost 20 years, but refineries have not been able to keep up with demand, so the FG is having difficulty paying off a backlog of subsidy bills for November and December. This has recently affected the importation of goods. According to Pinnacle Oil, fuel subsidies cost the nation approximately N1 trillion monthly.

In addition, NNPC Trade Ltd, a subsidiary of the NNPCL, can’t secure enough gasoline to meet national demand due to cash flow constraints caused by delayed outstanding payments to international traders, including major Swiss trading firms Trafigura, PV Oil Singapore PTE Limited, and Mercuria, oil major Total, as well as large Nigerian traders.

High operational cost to drill Nigerian oil

Oil production is far less expensive in Saudi Arabia, Iran, and Iraq compared to Nigeria. Nigeria is the second most costly location to extract crude after the shale oil patch in the United States. The Federal Inland Revenue’s chairman, Zacch Adedeji, reported that oil companies in Nigeria gave tax authorities an average cost of production of crude oil per barrel in Nigeria.

However, macros show that Nigeria’s Dangote oil refinery has begun supplying petroleum products to the local market, a significant step toward the nation’s goal of energy self-sufficiency.