A recent Reuters report suggest that buyers of Nigeria’s crude around the world are backing away from buying crude oil from Nigeria due to the bombings of crude oil installations by the Niger Delta Avengers Militants.
The report claims that “Refineries from India to the United States are backing away from buying Nigerian oil amid heightened uncertainty about deliveries as the country squares up to militants in the restive Delta region. Their reluctance to buy is limiting the prices Nigeria can get for its oil even as there is less of it”
This is a huge blow for Nigeria’s oil revenues and could signal another twist in the downward economic spiral Nigeria is facing. The recent apathy to buying from Nigeria is wide-ranging with analysts claiming that refineries need assurance of a steady flow of oil to guarantee production.
“Not everybody wants to be caught up in that, so they will avoid it,” said Olivier Jakob, managing director of PetroMatrix in Switzerland. “The refineries will walk away from it.”
According to Reuters again, “India’s HPCL was forced last month to cancel a vessel it chartered to carry 2 million barrels of West African crude due to the Qua Iboe force majeure. India’s state-run Indian Oil Corp. Ltd – a major buyer of Nigerian grades over the past year – has stated in its recent tenders that it would not take grades under force majeure. Qua Iboe remained off the list in its latest tender, according to a document seen by Reuters, an extremely unusual development in its requests for sweet crude.”
The report also claims that “Indonesia’s Pertamina, another frequent buyer, also chose not to buy Nigerian grades in its recent tenders, favouring Congolese Coco, Angolan Girassol and Saharan Blend from Algeria instead. Traders said Pertamina had shifted its preferences since the violence and uncertainty escalated, although Daniel Purba, senior vice president of ISC Pertamina, told Reuters by text message that Pertamina is “monitoring” Nigeria, but “currently it’s still not affecting crude purchasing.”
Impact on the economy
We believe that the impact of this on the stock market could be significant especially for stocks in the upstream sector. The likes of Seplat and Oando rely majorly on crude oil exports for their revenues. With the market threatening to cancel crude oil contracts from Nigeria, future revenues could be negatively impacted meaning that profitability will be dampened even more than expected. This is even more so if you consider that volumes have already been impacted by the recent spate of bombings.
The All Share Index in general could also be facing an imminent bearish third quarter as sentiments weigh in on demand from both local and foreign investors. The market expects positive sentiments when the CBN eventually releases their flexible currency policy but that could subsequently dampen when they reconsider the risk that of a looming revenue crisis for the country.
If refineries around the world continue to reject Nigeria’s oil then oil revenues will decline significantly. The effect is a far lower dollar reserve worsening Nigeria’s exchange rate position. The CBN’s new exchange rate policy is also likely to result in a semi-float where the Naira will be determined by market forces. Thus, a further dent on supply of dollars could introduce massive volatility that might lead to more investment apathy from the foreign investors that the policy originally sought to attract. The CBN probably expects this which could be why they are delaying on releasing details and also hell-bent on holding to the fixed exchange rate for select “essential import”.
The impact can be seen as a cliché as the relationship between oil price, sale and the health of Nigeria’s economy is well established. However, with the looming recession this probably puts things into greater perspective with regards to how worse things could get. For most Nigerians who believe the current situation of things is the worst we have seen, a situation where we have no buyer for our crude is another level entirely. It could affect, more companies, social amenities, development projects , the current budget and even more job losses. If Nigeria remains in a recession till the end of the year, then we could be staring at Nigeria’s first ever depression.