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Energy

Is this the halt of the supercycle for crude oil?

The markets are dicey at the moment and the idea of a supercycle might have just been a farce.

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Crude oil prices slump, as partial lockdowns resume

Crude oil prices have risen incredibly in 2021 amidst global vaccination, lockdown easing and sustained OPEC+ production cuts.

Analysts all over the world were beginning to speak about a supercycle for oil. Brent crude was gearing towards $70. Big banks in the US like Goldman Sachs and Morgan Stanley all made predictions of a $70 – $75 oil at some point in 2021. Christyan Malek, JP Morgan’s Head of Oil and Gas stated, “We could see oil overshoot towards, or even above, $100 a barrel.”

On Friday, 19th March 2021, Brent crude settled at $64 and WTI at $61 after a slump of about 7% last week Thursday – basically erasing all the gains made when OPEC+ sustained cuts in early March.

READ: World’s biggest oil company, Saudi Aramco pays a whopping $75 billion in dividend

Data Source: investing.com

What seemed like an incredibly bullish outlook for oil in early March when oil prices were 30% up YTD have dropped significantly and here is why:

US Bond Yields

The rising yield on US 10-year bonds has caused a stir in the market and it has a domino effect on the global market. How did this happen? The US feds rounds of quantitative easing and stimulus checks in the market have essentially created an inflation problem.

  • When fund managers anticipate the inflation is going to rise it pushes the yield on government bonds up.
  • As a bit of background, US bonds are classified as the safest investments globally. A promise of higher yield on the fixed-income asset class caused a selloff on oil futures.
  • This is not only peculiar to commodities but also to other assets classes like stocks. As long as the US bond yield remains a lingering issue for the Fed and investors, it is very difficult to see a $70 oil.

READ: Number of Bitcoin millionaires worth at least $5.7 million hit one month low

Stronger Dollar Index

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  • With the US yield rising, this makes the dollar stronger compared to other currencies because other countries cannot compete with the US bonds, you might ask why? But the answer is simple, when the US bonds have higher yields because they have a better creditworthiness than most countries, investors will favour moving their funds to the US.
  • As more investors flock to the US bond market it creates a higher demand for the US dollar over other currencies which increases the value of the FX.
  • First, oil is priced in dollars. Although the relationship is not perfect with certain conditions responsible for deviations that might occur, there’s normally an inverse relationship between the dollar and oil prices (in fact all commodity prices).
  • Historically, the price of oil drops when the dollar strengthens against other major currencies which affects the purchasing power. A stronger dollar means oil becomes expensive to purchase.

READ: Critical times for Nigeria’s oil money as US-China trade war escalates

Weekly EIA report

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  • The Energy Information Administration released its weekly stockpiles report with 2.396 million barrels last week, marginally ahead of the consensus expectation.
  • Basically, the EIA report shows the amount of crude oil barrels in the market, and if there are more crude oil barrels than anticipated it indicates there is a demand problem and the market is oversupplied.
  • Some analysts have long questioned the reality of the oil price from a demand perspective, with strong indications that the futures market does not reflect the true reality of the physical market due to backwardation – a situation when the futures prices are below the spot price.

China and India demand

  • India and China are net importers of crude oil and with a combined population well over 3 billion people, their moves in the market have a deep effect due to consumption levels.
  • The bulk of oil exports go to China and India and the weighting of global demand usually depends on both nations.
  • China’s demand has sustained oil prices for months and not much has changed except China’s growing interest in Iranian crude with a reported 856,000 bpd import, which has not gone down well with the US due to stringent sanctions on the Arab nation. Furthermore, this complicates OPEC´s effort to control the market and as a result oil price.
  • India never hid their dissatisfaction of high oil prices, Dhamendra Pradhan, India´s Petroleum Minister has on numerous occasions urged OPEC to reduce supply cuts because high oil prices were slowing down the economic recovery.
  • India who imports 80% of their crude oil has stated plans to diversify away from the middle east for supply which potentially brings the US shale producers in the market.

Bottomline

  • OPEC’s tight control of the oil market seems to be weakening after a very positive early March for the ‘cartel’. The market and geopolitical interests have seemingly slowed down a rallying oil. With these rising concerns, the OPEC meeting on the 1st of April has a lot riding on it than earlier anticipated.
  • The consensus is that Saudi will view the recent oil selloff as leverage to call for a rollover as the markets have not rebalanced. Traders are betting on a return to travel in summer to improve jet fuel. The markets are dicey at the moment and the idea of a supercycle might have just been a farce.

 

This article was co-authored by Adetayo Adesola and Opeoluwa Dapo-Thomas

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Adetayo Adesola is a Bloomberg LP trained market analyst and he is the Head of Content & Strategy at Nairametrics. You can reach Adetayo here: https://www.linkedin.com/in/adetayo-adesola-6420496a/


Opeoluwa Dapo-Thomas is an Investment Banker and Energy analyst. He holds an MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected].com.

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Business

NNPC says NO to petrol pump price hike in May

There would be no increase in the ex-depot price of Premium Motor Spirit in the month of May 2021.

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Crude oil market remains unpredictable- NNPC Boss

The Nigerian National Petroleum Corporation (NNPC) has assured Nigerians that there would be no increase in the ex-depot price of Premium Motor Spirit, popularly known as Petrol in May.

This was disclosed by the Group Managing Director of NNPC, Mele Kyari, on Monday via the Corporation’s Twitter handle.

It tweeted, “There would be no increase in the ex-depot price of Premium Motor Spirit in the month of May 2021.”

Ex-depot price is the cost of petrol at depots, from where filling stations purchase the commodity before dispensing to final consumers.

READ: Nigerian automaker raises $9 million despite protest against electric car in Nigeria

Kyari also added that Petroleum Tanker Drivers had suspended their proposed strike after the intervention of NNPC in the impasse between the PTD and the National Association of Road Transport Owners.

“We have given our commitment to both NARTO and PTD that we will resolve the underlining issue between them and come back to the table within a week so that we’ll have a total closure of the dispute,” he added.

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READ: Oil marketers give conditions to resume fuel importation

What you should know

  • NNPC has maintained an ex-depot price of N148/litre since February despite the hike in the actual cost of the commodity, hence incurring subsidy of over N120bn monthly.
  • Also in March, the NNPC said it would maintain its ex-depot price for petrol until the conclusion of ongoing engagement with the organised labour and other stakeholders.

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Energy

NCDMB’s Oil and Gas Parks and their many adversaries

New businesses within the NOGAPS will face intense competition from foreign OEMs that do not have to battle with tariffs, a harsh business terrain and different tax treatment.

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In 2018 the Nigerian Content Development and Monitoring Board (NCDMB), the body saddled with driving the development of Nigerian content in the Nigerian oil and gas sector, did a groundbreaking of the Nigerian Oil and Gas Park Scheme (NOGAPS), a scheme that involves the construction of sprawling oil and gas parks in Bayelsa, Imo and Cross Rivers State.

In a visit last week to one of the parks currently under construction in Emeya 1, Ogbia, Bayelsa State, the Minister of Petroleum for State, Chief Timipre Sylva, expressed delight at how the project was quickly progressing and was now at 70% completion. Mr Simbi Wabote, Executive Secretary of the NCDMB, during the visit also noted that the Oil and Gas Park project “is in line with the Federal Government’s mandate to develop indigenous capacities for the oil and gas industry.”

READ: NCDMB, BOI, won’t relax conditions to access $200 million NCI Fund despite complaint 

While this is highly commendable, as the project will indeed reduce Nigeria’s dependence on import of oil and gas equipment and provide jobs for local indigenes -which would likely reduce restiveness in the area-, there exist significant challenges to this project achieving its goals.

Perhaps one of the biggest of them is the African Continental Free Trade Area (AfCFTA) regime which is expected to open Nigeria’s borders to an influx of imports from other countries within Africa. Beyond opening the borders, however, the tax treatment given to domestically produced items will be no different from similar products imported, and the typical tariffs for imported items will be removed.

READ: Aiteo accuses Shell of theft of 16 million barrel of crude oil

This essentially means that large and established original equipment manufacturers (OEMs) from other African countries may on the basis of their economies of scale be able to supply the same products produced in the oil and gas parks at lower rates. A report by Dun & Bradstreet reveals that in Africa, countries like Guinea, Gabon, Burkina Faso and Ghana that flank Nigeria play host to various oil and gas OEMs.

With the large oil and gas market Nigeria has, these companies will seek to make inroads into Nigeria under the AfCFTA regime. This will mean that the new businesses within the NOGAPS will face intense competition from foreign players that do not have to battle with tariffs and different tax treatment. Additionally, the Nigerian culture of preferring imported products over domestically manufactured ones might play a role in this, particularly if the prices of the imported ones even up with domestically produced ones or only have a slim margin.

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READ: NNPC says local operators must improve capacity to achieve low cost of oil production

If the patronage for Innoson vehicles is anything to go by, in a market where there is no real difference in price between that and the domestically produced ones, we will see a preference for imported products.

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All of this will be further aggravated by Nigeria’s doing business difficulties. Things like delays in obtaining permits, approvals and licenses, the corruption that accompanies these processes, weak currency and dual exchange rates, poor infrastructure and lack of power supply abound. While the Nigerian businesses struggle with this, their foreign counterparts get to produce under more convenient conditions and are thus able to deliver within time and without the additional costs passed to consumers through these poor doing business practices.

While Mr Wabote has promised that the park in Ogbia will have dedicated power supply, it is hard to imagine that this power will not significantly cost the businesses if they are served at maximum capacity. At number 131 on the World Bank’s Ease of Doing Business Ranking, a park would not solve Nigeria’s problems, only a positive commitment to fix these doing business issues will.

READ: Seplat incurs N41.1 billion loss from OML 55, blames fall in oil prices

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The christening of a park as an “oil and gas park” in the 21st century, where countries of the world –and indeed private companies- are working towards achieving increased use of cleaner energy sources, is counterintuitive. The park should be an energy park that integrates significant research and development in its function as well as innovation and production of renewable energy equipment, both adapted to benefit from local conditions and standardized for export purposes.

It seems too, that not much consideration has been given to export of these equipment, as the parks earmarked so far are in landlocked Imo, port-less Bayelsa and Cross River that feeds into Cameroon, which is not a very prime market, although the DRC on the other end could attempt to compensate for this. It might be worth considering, the setting up of a park in Lagos – perhaps in the same vicinity as the Dangote refinery.

The park would benefit from being able to supply equipment to the refinery (especially as the refinery starts production in early 2023). It will also be able to tap into the global market through export via the Lekki port. This might also be a good time for the Agge deep sea port mulled by the Bayelsa State government to come onstream to open up the Ogbia park to a global market.

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