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Fuel Crisis Looms over Non-Supply of Crude to Oil Traders, Forex Challenges

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Barely four months after the federal government adjusted the pump price of petrol upwards from N86.50 to N145 per litre to stabilise product importation and distribution, oil traders have raised concern over likely scarcity of the product.

The fear expressed by the marketers stemmed from the alleged inability of the Nigerian National Petroleum Corporation (NNPC) to supply crude to some oil traders and refineries in exchange for refined products, under the Direct Sales-Direct Purchase (DSDP) contractual arrangements initiated with some selected oil traders and foreign refineries some months ago.

The marketers were also alarmed by the increasing challenges facing them in accessing foreign exchange, and threatened that they might abandon petrol importation in the hands of only the NNPC, potentially plunging the country into another energy crisis.

They warned that the pegging of the pump price at N145 was based on N285 exchange rate and that the depreciation of the Naira in the inter-bank market to an average of N315 has created a huge gap left to be filled. Warning that it was not feasible for the price to remain at N145 with the current FX reality.

But the Group Managing Director of NNPC, Dr. Maikanti Baru has dismissed the fear of possible scarcity, saying that the corporation has continued to meet its obligations to marketers and foreign refineries in the areas of foreign exchange allocation and supply of crude oil under its DSDP contracts with the oil traders.

While the marketers alleged that the corporation has defaulted in the supply of crude oil to the foreign refineries, Baru dismissed this claim, revealing that NNPC currently accounts for 90 per cent of petrol imported into the country and has 1.3 billion litres of petrol in reserves “and is not about to let the country go through another crisis of scarcity”.

Following the controversy, which trailed the NNPC’s Offshore Processing Arrangement (OPA, the corporation had adopted the DSDP framework under which it provides crude to selected traders and refineries in return for petroleum products in full and extra margins, unlike the OPA.

DSDP also eliminates all the cost elements of middlemen and gives NNPC the latitude to take control of sales and purchase of crude oil transaction with its partners.

But sources close to the marketers said the corporation had defaulted in the supply of crude oil to the foreign refineries, thus threatening the steady supply of petroleum products in the country.

According to them, lack of crude oil due to the attacks on oil facilities in the Niger Delta, has hampered the corporation’s ability to meet its contractual obligations under the DSDP.

The marketers said that since the programme started, the NNPC had not been able to supply crude oil to the oil traders.

“The militants stopped almost all the onshore production and because of this, NNPC has no crude to supply to the traders. The oil traders supplied petrol initially but stopped when the NNPC was not bringing crude. The traders had to stop because they did not want a repeat of the 2008/2009 crisis when they were indebted to the tune of over $3 billion due to NNPC’s inability to meet obligations. Fresh crisis is looming.”

Having lost over 70 per cent onshore and shallow water production to militant attacks, the NNPC can no longer access the 445,000 barrels per day allocation to the refineries, which is used to service the corporation’s DSDP agreement.

With the loss of production from the traditional terrains, the country’s oil revenue is currently derived solely from deep offshore production where the NNPC has Production Sharing Contracts (PSCs) arrangement with some international oil companies (IOCs).

The deep offshore fields sustaining Nigeria’s crude oil production include: Shell’s 225,000 barrels per day capacity Bonga field; Chevron’s 250,000 barrels per day capacity Agbami field; Total’s 185,000 bpd Akpo and 180,000 bpd Usan deepwater fields; as well as ExxonMobil’s 190,000 barrels per day Erha field.

Also Total’s 200,000 bpd Egina deepwater field being developed at the cost of $16 billion will start production in 2017 after the $3.3 billion Floating Production Storage Offloading (FPSO) vessel arrives the country in March or April 2017.

However, some of the five producing fields have not attained their nameplate production capacity.

Baru however in a telephone chat yesterday said there was no looming scarcity.

On the issue of alleged non-supply of crude to the traders, Baru said “at the moment, we have been giving them and I have also done a tender as a backup in case I have any issue.”

“So, there is no cause for alarm,” he added.

Also speaking on the foreign exchange challenges, Baru stated that NNPC has been assisting some of the marketers with proven financial capacity to pay for foreign exchange provided by International Oil Companies (IOCs).

“The criteria is important because we could give some of them the foreign exchange, but they may not have the capacity to pay for it. We checked with their banks to confirm that they have the financial capacity because we don’t want a situation where we give them the forex and its diverted or they can’t pay for it. So we carry out a thorough evaluation. We have NNPC, Central Bank and also PPPRA representatives on the committee that evaluates them on the basis of capacity to perform.

“And once we are satisfied on that basis, we now give them forex. To say there is no forex, I don’t think it is correct. At the moment as I am talking to you, I have over 1.3 billion litres and that is more than enough for this September. We have sufficient quantities and not in any scarcity. And we also have direct sales, direct purchase where I give them crude oil and they bring in petrol for me or any product that I choose to bring in,” Baru explained.

But some marketers who faulted Baru’s claim, alleged that the challenges of accessing foreign exchange has also hampered their ability to import petrol, thus threatening product availability.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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