India, which is Nigeria’s biggest crude oil buyer, has made moves to purchase oil from the United States. Data from Platts shows Indian Oil Company (IOC), a state owned oil company had issued a tender for US crude to be delivered in December and was expecting a 2.2 million barrel cargo in October.
Why is India making the move?
Nigeria and the United States produce the same blend of crude oil called light sweet crude. The US, is closer to India which makes the cost of shipping, and ultimately the crude oil cheaper. US also produces crude from shale deposits which have a lower production cost compared to conventional oil production. The United States is not a member of the Organization of Petroleum Exporting Countries (OPEC) and is thus not bound to restrict its production volumes or sell at a particular price.
What can Nigeria do ?
Nigeria may have to scout for other buyers, a difficult task in a market that is currently oversupplied. The country could also decide to absorb a greater proportion of the shipping costs which would lead to a drop in crude oil revenue.
Implications of India’s move
A drop in the volume of crude sold means a drop in revenue for the government. Government makes over 70% of its revenues from crude oil. This also affects foreign exchange revenue, which is key in an import dependent country like Nigeria. The Central Bank of Nigeria (CBN) maintains the exchange rate within a fixed band using oil revenue. A drop in oil revenue could lead to a depreciation of the Naira and a fall in external reserves. Nigeria’s external reserves recently hit a high of $40 billion on the back of a rebound in global crude oil prices and production volumes in Nigeria.