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Supply overhang: where will Nigeria’s crude oil go?

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Indonesia could become another key importer of Nigerian crude oil

Nigeria has recorded a significant overhang in its crude oil sales in the last few months and particularly so in the past few weeks. As at 3 June, the country had an estimated overhang of about 15 cargoes from its cargoes loaded for June delivery, while at least half of the 54 cargoes loaded for July (announced in May) were still available.

The situation is largely underpinned by the low imports from the two leading importers from the Atlantic Basin – China and India. China’s oil imports fell 23 percent in May as Chinese oil refiners resorted to use of oil out of their storage facilities, while conducting maintenance at their refineries. India substituted oil from the Atlantic Basin with oil from Iran and Iraq. Ahead of the June 30 nuclear deal with the EU and US, Iran has made steady efforts to boost oil imports to India, an erstwhile major buyer of Iranian crude.

Thus in May, Indian oil imports from Iran leaped 40 percent over April to about 367,000 bpd. This development has put significant selling pressure on Nigerian crude (as well as other West African crude grades) with the major crude grades such as the Bonny Light and Forcados now selling between 35 to 50 cents on the Brent. With August loading programmes set to be released this week, the glut in the region could increase and strengthen the selling pressure on crude cargoes from the Atlantic Basin region.

Analysts believe this development could have an adverse impact on the Nigeria’s oil revenues. ‘In our opinion, this development could have far reaching impact on Nigeria’s oil revenues in H2 2015 as market share competition in Asia results in dislocation and substitution of crude import sources,’ Ecobank said in a research note. It added that Saudi Arabia has increased its oil output from 9.7 million barrels per day (bpd) in January to 10.33 million bpd in May to block out other competitors. Iran could also ramp up output after June 30, and more importantly oil exports, relying on oil produced into storage already.

However, Nigeria’s crude oil cargoes could clear market within the next few weeks and head to Europe due to the higher refining margins in Europe riding on low oil prices. Furthermore, with the summer driving season around the corner and resumption of gasoline imports from Nigeria, gasoline demand in Europe is expected to rise, boosting refinery run rates. Europe’s key refining hub in Netherlands could see major gasoline imports demand in coming weeks.

Canadian refiners have also taken advantage of the heavy discounts on Nigerian crude grades to buy more of Nigeria’s light grades for blending with their heavy crudes. Arbitrage opportunities exist for well-discounted Nigerian crude cargoes in Canada due to the decline in the Brent-WTI spread. The trend is further supported by a decline in US crude oil exports in 2015. US crude oil exports to Canada have fallen 23 percent since January.

Over the medium term, Indonesia could become another key importer of Nigerian crude oil. The country’s oil imports from Nigeria have grown over the past five years from under $1bn in 2010 to about $3.3bln in 2014. Although consistent in its imports from Nigeria, over the past few months the country has also substituted Nigerian oils with other cheaper crude grades out of the Gulf & Middle East.

Indonesia’s developing crude oil trade relations with Nigeria could create an opportunity for
Nigeria to play a key role as Indonesia looks to develop oil refineries and crude oil storage over the next 18 months. 4 new refineries with capacities ranging between 300,000 bpd and 350,000 bpd are set to be completed within the period, as well as a storage facility, which will hold about 45 million barrels, i.e. 30 days of consumption.

Over the long term, India is the most important strategic replacement for the US in Nigeria’s
export market mix. The country’s refineries have traditionally preferred Nigerian crude to other lighter crude grades from the Gulf countries, Middle East or even the recently acquired tastes –Latam crudes. The country has indicated strong interest in buying directly from Nigeria and could potentially reach a deal in October to contract a portion of the country’s crude oil cargoes.

However Iran’s plan to ramp up output and exports following its June 30 deal could pose a major risk to Nigeria’s key markets in India and Indonesia. Iran’s production is expected to grow to 4 million bpd in Q2 2016 from 2.8 million bpd in May. The additional crude oil production is expected to be marketed to India, with Indonesia also looking to secure dedicated flows. This could result in displacement of crudes out of the Atlantic basins, especially Nigeria, in these countries.

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