Nigerian Oil Hurt by Tussle Between OPEC and U.S

Once a highly desired, easy-to-refine product, Nigeria’s oil is now hard to sell


In the escalating duel between U.S. and OPEC oil production, few countries’ oil industries have been hit as hard as Nigeria, highlighting a challenge for the petroleum cartel ahead of its meeting Friday.

The West African nation has lost business in its main market in the U.S.
and struggled to gain footholds elsewhere, raising a question for the Organization of the Petroleum Exporting Countries over whether its decision to fight for market share may have left behind more vulnerable members.

Once a highly desired, easy-to-refine product, Nigeria’s oil is now hard to sell. In 2014 it fetched more than $2 a barrel more than the global benchmark, Brent crude, according to OPEC data. This year, that premium has plunged to 74 cents, on average—the lowest in a decade.

Nigerian cargoes that normally sell a month ahead of delivery have languished without buyers. In early May, at least 80 million barrels of Nigerian and Angolan crude were still seeking buyers, according to Barclays.


OPEC last year abandoned its traditional role of propping up prices through production cuts, figuring that surging American production would depress prices no matter what it did and opting to fight for market share instead. Within OPEC, Ms. Sen said, Nigeria has been the worst affected by these changes.

The state-run Nigeria National Petroleum Co. and the country’s oil ministry declined to comment.

Its plight highlights divisions within OPEC as the group’s ministers begin arriving in Vienna
this week. Venezuela, Algeria and Angola have also struggled while wealthier OPEC members such as
Saudi Arabia and Kuwait ramp up production and lock down buyers in Asia.

Nigeria’s situation also raises a red flag about the strength of a recent oil-price recovery.
After crashing from $114 a barrel to $45 from July to January, the Brent price has gone up more than 30% since, closing at about $65 on Friday.

A disconnect between the price of oil-futures’ contracts and the price paid in daily physical transactions was a precursor to the collapse last year,though analysts disagree about whether Nigeria is symbolic of the larger market.

“The Nigerian barrel is really now the swing barrel,” said Eugene Lindell, an oil market analyst at JBC Energy. “That’s on our radar and when we see West African barrels underperforming, then we’re worried about the global crude market.”

Nigeria is Africa’s largest oil producer and ranks 13th in the world, pumping about 1.9 million barrels of oil a day. That is less than the Middle East’s biggest producers that include Saudi Arabia, Iran and Iraq, and about the same as Norway.

Its flagship crude oil, known as Bonny Light, is similar to American shale oil. It is generally called “light and sweet” because of its low sulfur levels
and low density, which means it will flow easily at room temperature and is more easily refined
into high-value products such as gasoline and diesel.

U.S. refineries have generally moved to buy the cheaper,easier-to-access local version rather than importing Nigerian product in recent years.
Imports of Nigerian crude oil into the U.S. have plummeted from nearly 1 million barrels a day in 2010 to less than 60,000 barrels a day in 2014,
according to the U.S. Energy Information Administration.

Around the world, Nigeria’s barrels have had trouble competing with cheaper products from the Middle East.
It has found buyers in India and Europe, but some new and high-tech refineries in Asia prefer to run different oil grades,
leaving Nigeria in need of a new core customer base.

That has made it difficult for Nigeria’s government to balance its budget. Oil accounts for close to 90% of Nigeria’s exports and roughly 75% of
its consolidated budgetary revenue according to the World Bank. The International Monetary Fund predicts Nigeria’s oil exports will
be worth $52 billion this year, down from $88 billion in 2014.

According to Deutsche Bank, Nigeria needs oil prices at $87.90 to balance its budget, a level most oil analysts don’t see happening soon.
Stubbornly low prices prompted Nigeria to raise the issue of an emergency .OPEC meeting earlier this year, though it didn’t materialize.


It all comes at a sensitive moment for Nigeria. On Friday, Mohammadu Buhari was sworn in as president in a rare peaceful transition of power.
The country had also recently been rocked by fuel shortages, though some have blamed politics and not revenue problems for the issue.

For OPEC, Nigeria’s struggles could signal a potential problem for the group’s unity as it decides this week whether to continue its strategy of
fighting for market share—a strategy kingpin Saudi Arabia argues is working.

According to its latest public projections, the producer group expects non-OPEC production to grow by just 680,000 barrels a day this year, a
precipitous drop from 2.17 million barrels a day in 2014. That is expected to increase demand for OPEC’s oil.

But that strategy doesn’t take into account the seismic shift the oil market has undergone in the last few years that underpins the challenge
facing Nigeria’s oil sector. The producer group needs to go further, said Dolapo Oni, energy analyst at Lagos-based Ecobank Capital.

OPEC “should focus on how OPEC members can gain market share as a group,” Mr. Oni said.

Very true

These are the kind of things I would expect the new govt to be discussing and analyzing as a matter of urgency. The situation is indeed grim, not only is the price of oil falling but demand for Nigeria's oil in particular is also falling. Tough measures will need to be implemented across all tiers of govt to reign back spending, but till now this is not even part of the national debate.