In the past week, the global LPG market suffered a sharp decline in price; with a fall from 1.5 million naira to 1.25 million naira per 20MT. The ongoing decline in LPG price is the result of the current unease in the global atmosphere, with countries working effortlessly to combat a pandemic that has shocked the world with its bullish nature. The COVID-19 virus had infected well over a hundred thousand people and had killed almost 4,500, as of the 11th March 2020. The spread is causing global panic, and is affecting global markets – stocks, commodities, clothing, energies, etc. The oil and gas market is taking an indirect hit due to this. In the heat of this pandemic, the ongoing rift between Saudi Arabia and Russia has also led to a notable drop in oil and gas prices. Saudi’s price cuts have caused other traders to follow suite, causing a global reduction in oil and gas prices. These two events have directly and indirectly led to a bearish trend in the global and local Liquefied Petroleum Gas (LPG) market.

One Virus, Multiple Effects
The COVID-19 virus, first discovered in China, has spread to 87 countries of the world, with a 4% mortality rate. A common response to a national or global health crisis is the reduction of public interactions; this is a form of self-preservation. Tourist centres, and usually busy areas have been abandoned e.g. Disneyland. The effect is less people are travelling or moving about in their countries. This has led to a significant drop in flight prices to increase demand, showing the effect of this crisis on a seemingly unrelated, but interconnected industry. The oil and gas industry has also been affected by this crisis. In China, a country with the second biggest demand for oil, the reduction in mobility has reduced the demand for the fuel. In the words of Cailin Birch, “The main reason why corona virus is a threat to oil prices is that China is the main new consumer of oil in the world”. This caused the price of oil to trickle down in mid-February, and it has kept trickling down as more people around the world are going into quarantine (the price of a barrel of crude oil fell by $15 between the 6th of January,2020 and the 6th of March,2020 – based on WTI Crude prices). This effect of the virus could have been predicted, but the virus has had another effect on the oil and gas market, which shall be described next.
The second major event that has affected the LPG market this week is the Saudi price cut. Saudi Arabia and Russia – two of the biggest players in the global oil and gas market – have been having a rift based on compliance to OPEC agreements. Russia, a non-OPEC member, has a relationship with OPEC that accords it the expectation of complying with OPEC agreements, but Russia usually ignores these. The most recent was the OPEC agreement to reduce production due to Saudi Arabia’s drop in demand. China is a major buyer of Saudi oil, and the COVID-19 pandemic has reduced the demand for oil, by at least 500,000 barrels per day. The goal of the drop in production was to stabilise the market and prevent a plummet in the prices due to excess supply. OPEC nations agreed to cut production by 1 million barrels per day, while non-OPEC nations cut theirs by 500,000 barrels per day. Russia decided to go ahead with their normal production rates, causing Saudi to respond with the price cuts.

FIGURE 1 BI-WEEKLY TREND OF 20MT LPG PRICE IN THE INTERNATIONAL MARKET

Market Analysis
The international LPG market closed at 1.5 million naira on the 6th of March, and one week after, on the 13th of March, it closed by 1.25 million naira, which was a 17% drop. This price drop has negatively affected other economies, particularly those whose revenues depend on oil sales. Saudi hopes to make up for the loss in profit (although, they can profitably sell at low prices) by increasing the quantity they produce. While this might be convenient for the Saudis, because they have the largest spare capacity, other OPEC and non-OPEC nations are not going to be able to cushion the effect of the price cut by increasing production. Another consideration to the increase in production quantity is the fact that this situation was caused by the crippling effect of the COVID-19 virus, which is still spreading across the globe. The continued spread of the virus will gradually reduce economic activities, which in turn reduce the demand for oil. The increase in supply will not be commensurate with the global demand, which will probably lead to excess crude stockpiled. This will once again, lead to a necessary drop in production rates.
Another angle to look at this week’s events from is that cooking gas is now cheaper to purchase. The average landing cost of 20 MT of LPG into Nigeria, based on the KiaKia Gas Depot Price Index, was 3.7 million naira at the close of last week, and it was 3.54 million naira at the close of this week. To put it in better context, the cost of a kilogram fell from 185 naira to 177 naira. This will find expression in the retail outlets (although prices differ based on retailer).


FIGURE 2 BI-WEEKLY TREND OF LANDING COST OF 20MT LPG INTO NIGERIA

What Comes Next?
The price war does not seem to be such that will stay around for long. First, the Saudis will be pressured by the other OPEC nations to end the price war. Russia on the other hand will not receive pressures from any organisations. Russia can also hold out for long, as President Putin and the Russian Energy Minister Alexander Novak are known to make tough decisions concerning the energy sector, while the Saudi government cannot be said to do same. The Saudi government is also under internal pressure to end the price war. This is from their citizens, of which 20% bought stocks in Saudi Aramco (Saudi Arabia’s national oil company), after the government encouraged them to do so. Aramco stocks are currently worth less than they were at the time of the initial offering and seem to be plummeting further. The government will have to take steps to appease the 20% of the population who invested, and that will not be achieved while oil sells for such low prices.
If the already existing trend and the recent events are anything to go by, prices are expected to continue this downward trend till the causative factors are resolved. A major question to be asked is whether Saudi will return to normal prices if Russia remains adamant against the production cut agreement. Also, the resolution of the Saudi-Russia rift will not stop the downward trend, but it will prop up the prices noticeably. The downward trend of the prices will be stopped when economic activities return to normalcy, i.e. when the COVID-19 virus has been defeated.
The Nigerian economy is heavily dependent on then revenue received from crude oil sales. The National budget was drawn up with oil sales pegged at $60 per barrel, hence the there will be a deficit if the oil is sold for less than $60 per barrel. This will result in the National Assembly revisiting the budget to make it reflective of the current oil price, if this price cut lingers. If the budget will not be revisited, then the government will have to apply for more loans which is inadvisable. This budget cut is expected to have a ripple effect across the economy. Therefore, the government has planned to cut the budget, because the oil price might dip further. The effects of this will be seen in the coming weeks.



KiakiaGas Limited is a leading Gas business in Lagos,Nigeria with expertise in LPG retailing, New Gas Market development, Building of Gas Plants and Gas strategy advisory
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