Oil price war: bleak outlook for Nigeria

State-owned Saudi Arabian Oil Co. on October 1 cut prices for all grades and to all regions for November. The Asian price of Arab Light was cut by $1/bbl to a discount of $1.05 to the average of Oman and Dubai crudes. Commerzbank and Citigroup immediately projected that the cuts might be the start of a price war among members of the Organization of Petroleum Exporting Countries seeking to maintain market share.

Kuwait, Iraq and Iran typically adjust their crude prices using the Saudi official selling price (OSPs) as a guide.

OPEC members are denying that a price war is starting because it is not in their long-term interest.

Iran matches Saudi oil discounts

Iran has said it will match price cut by Saudi Arabia and will sell its oil to Asia in November at the biggest discount in almost six years, as global crude benchmarks slide deeper into a bear market.

State-run National Iranian Oil Co. cut official selling prices of its crude to buyers in Asia for November. The decrease came a week after Saudi Arabia reduced the price of Arab Light crude for Asia to the lowest since December 2008. Brent crude, the international benchmark, fell to the lowest in almost four years.

The timing of Iran’s price cuts makes the price war more and more probable. Iraq, the second largest producer of OPEC, has also priced its Basra Light crude at the widest discount against Arab Medium in a year, after Asian buyers had steered clear of its flagship grade on fears an Islamist insurgency would disrupt supplies.

Kuwait proving to be a big Saudi rival

Kuwait is leading the challenge in an increasingly competitive battle for market share, selling oil to buyers in Asia at the widest discount to a comparable Saudi grade in 10 years.

Kuwait has mounted the most aggressive effort to protect and expand its market share in Asia, the only region with a growing appetite for OPEC oil. Whether Kuwait Petroleum Corp (KPC) makes deeper cuts to its November prices, due out any day, may determine whether the battle escalates.

Kuwaiti crude in October is already 50 cents a barrel cheaper than Saudi Arabia’s official selling price (OSP) for its Arab Medium grade, the widest discount since at least 2004 and double the discount from a year ago.

Asia’s top four crude buyers, China, India, Japan and South Korea, imported just over 1.1 million barrels per day (bpd) of Kuwaiti oil in the first eight months this year, down from close to 1.4 million bpd last year.

To boost sales, Kuwait concluded in August a new 10-year deal with China’s Sinopec Corp to nearly double its supplies by offering to ship oil and sell it on a more competitive cost-and-freight basis.

Asia as the beautiful bride

Middle-east oil producers are facing greater competition in Asia, their largest market. A well-supplied global market has tipped the balance in favour of Asian buyers, who are switching to cheaper oil from Africa and the Americas as they reduce their reliance on Middle Eastern crudes. Cargoes from the US, Russia and Latin America are finding buyers there amid a surplus on international markets. The pace of demand growth is lower in the region as the economy slows in China, the world’s second-largest oil consumer.

Defending and winning share in Asia’s still growing markets has become the primary focus, too, as demand has softened in the United States with rising shale oil output and in Europe with weak economic growth in the eurozone.

Bleak outlook for

Nigeria

The ongoing price war amongst OPEC members paints a bleak outlook for Nigeria.

Crude oil exports account for over 90 percent of Nigeria’s foreign exchange earnings. Nigeria’s fiscal risks have become elevated as dwindling oil demand as a result of the price war is bringing them closer to the break-even point at which the Federal and State government budgets become untenable.

Nigeria is currently experiencing lower than expected demand for their crude oil. About half of Nigeria’s planned November exports remain unsold at present. Usually, 75 percent of the country’s crude for November would have found buyers by this time, but the situation is different. It is a manifestation of greater price competition which has altered the market dynamics.

The 2014 Nigerian budget is based on a benchmark oil price of $77.5/ barrel and at the current price of $90 per barrel; it is quite difficult for Nigeria to compete for market share with price cuts. The situation is made further difficult as any price cushion is eroded from the unrealistic production assumption of 2.3 million barrels per day, as output has been running close to the 1.9m bpd mark.

Frank Uzuegbunam