Nigeria, OPEC and battle to retain market share
As the prices of crude oil continue to decline, members of Organisation of Petroleum Exporting Countries (OPEC) have embarked on battle to retain share of the international oil market.
Crude oil prices had fallen from $140 a barrel it recorded some years ago to around $40 a barrel as at the weekend.
But the new OPEC Secretary-General, Mohammed Sanusi Barkindo, believed that, “prior to the correction in 2014 when oil sold for as high as over $100 per barrel — and at a time $140 per barrel — was something that was abnormal”.
Some OPEC members have agitated for production cut while others have to slash the price of their crude oil blend just to be able to sell off the product and protect its buyers from other countries, which may reduce prices in order to clear their unsold cargoes.
Experts believed that discounting in oil and gas sales is allowed among OPEC members.
For instance, in July last year, with over 15 cargoes remaining unsold for July delivery alone, the Nigerian National Petroleum Corporation (NNPC) had to cut its July official selling price formulae for Bonny Light and Qua Iboe to 10-year low.
Also, Saudi Arabia in June this year cut its oil prices to Europe, signaling mounting competition after OPEC failed to cap its output amid Iran’s exports ramp up.
In an email sent to customers, state oil company Saudi Aramco said it had cut its light crude prices by 35 cents a barrel to northwest Europe and by 10 cents a barrel to the Mediterranean for July deliveries.
Again, just last week, Saudi Aramco, lowered the pricing terms for Arab Light crude sold to Asia by the most in 10 months, signaling that Saudi Arabia has no plans to back down, while OPEC rival Iran tries to regain market share amid a global oversupply.
Even, the National Iranian Company is said to have sold its Forozan Blend in May to Asian customers at $2.43 a barrel below the average of the Oman and Dubai benchmark grades.
But experts believe that OPEC is responsible for international price fixing, while individual members countries are also allowed to either increase prices of their crude oil or reduce it.
Bassam Fattouh of United Kingdom-based Oxford Institute for Energy Studies stated: “OPEC can only hope to influence price movements towards a target level or target zone. In a supply–demand framework, the oil price is determined by OPEC and non-OPEC, as well as, oil arriving to the market from OPEC members who do not abide by the assigned quotas. Since these supplies cannot be predicted with accuracy and are influenced by factors other than prices, OPEC can only hope that the resulting oil price is close to its preferred price.”
Speaking with journalist on the side line of the Platts Oil and Gas Forum in Lagos, Fattouh, the Associate Editor, Europe and Africa Crude Oil, Platts, Gillian Carr, said market forces usually force OPEC countries to offer discounts as measures for retaining their share of the market.
She said with the cut in Saudi Aramco’s official selling price in Asia, Nigerian crude would be a little affected.
Carr stated: “The one place that Nigerian crude could be very much affected is in the Mediterranean because right now, there is a large amount of oil that is going into the Mediterranean refineries.
“Often, if one country cuts its price, other countries will follow just to maintain market share.”
Also, the Editorial Director, European and African Oil, Platts, Joel Hanley, said that Nigeria’s differentials have fallen and to an extent because flat prices have fallen, from a $100 oil environment to a $40 oil environment.
“But I think those of Nigerian grades have come down further than most proportionally because they have lost that market share in the US and they are having to price more aggressively into the Mediterranean and northwest Europe.”
“Also, there is that concern over force majeure. If you get to buy something that has a lot of risks attached to it, you will want to pay less for it. And I think that is where the reputation of Nigeria really needs to get strengthened by security of supply of crude,” Hanley said.
According to him, there are various countries such as Taiwan, India and China that won’t take a grade in a tender that has been in force majeure in previous month.
He said: “If you look at Forcados; it has been in force majeure for a long time. And this was a very reliable stream. And it is this kind of near-offshore grade that a lot of the Western companies have turned away from.
“Look at the companies selling their assets: Shell, Chevron and Total. They moved away from them because of lack of certainty of security of supply. That threat will always create some kind of discount.”
Hanley said Nigeria needs to push up back to 2.5 million bpd of production to get its foot back into the market.
According to Hanley, the two major threats for Nigerian crude at the moment are over production from the US and security of supply.
He said: “There is a lot of oil competing with Nigeria’s around the world. The US is buying less oil from the international market because it is producing more. I think the security of supply is a big issue in Nigeria.
“We have 500,000 barrels per day shut-in for various reasons, mainly pipeline explosion, bunkering and lack of integrity from the pipeline system. Similarly, there are other attacks that lead to supply disruption. So, without that trust, I think Nigeria is going to struggle to earn back an interesting market share.”
He said, “There is an opportunity for Nigeria to diversify the buyers. People are quite so interested in light sweet crude oil these days in comparison to the old days when heavy sour crude was deeply discounted.
Member countries of the OPEC produce about 40 per cent of the world’s crude oil, with exports representing about 60 per cent of petroleum traded internationally.
But when OPEC failed to reach agreement on controlling oil production levels at its April meeting, prices surprisingly crept up higher, but only to remain at the present level of $40 a barrel.
Barkindo said in OPEC Bulletin released last week Friday that it is part of OPEC statute to stabilize the market. He said, “Consumers generally are averse to volatility of prices and the global economy is also sensitive to price fluctuations. OPEC has made the central point in its statute the stability of the oil market and all decisions of OPEC are geared towards that.”
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