Surging crude prices are posing another headwind for the world economy after President Donald Trump’s “zero” pledge on Iran oil sales.
Brent crude has risen about 33 percent this year and is close to the highest in six months. While higher prices due to strong demand typically reflects a robust world economy, a shock from constrained supply is a negative. Meanwhile, Nigerian crude oil for last month (April) has been slow to sell, with offer levels providing little value compared with rival grades from the Mediterranean, North Sea and Latin America.
However, the Northwest European buyers already consider West African grades to be on the expensive side. A further rise in prices will not help Nigeria. Just from an economic perspective, buyers will further swing away from West African crude. Current linear programming runs signal that as well. Linear programming is a model used in refinery planning and scheduling in regards to what grades to select to optimise refinery runs and yields.
North Sea grades
North Sea BFOE grades – Brent, Forties, Oseberg and Ekofisk – saw significant downward movement last week, weighed on in part by large arrivals of US crude into Europe while Chinese buying eased, sources said. The Dated Brent differential was assessed at minus 56.5 cents per barrel last week Tuesday, down 1 centper barrel day on day. The Brent and Forties blend values flipped into negative territory versus Dated Brent in the last decade of February as buying interest vanished to give way to competitive selling activity in the Platts Market on Close assessment process. Nigerian Exporters, however, do not expecting North Sea crude to displace West African grades just yet, even if the global prices increase with one trader saying the distillate yield of West African crudes would keep them competitive.
Globally, much will depend on how sustained the increase proves to be. Exporting nations like much of the Middle East and the united sates will enjoy a boost to corporate and government revenues, while consuming nations will bear the cost at the pump, potentially fanning inflation and hurting demand. However, for Nigeria, the analysis is a-bit mixed, since Nigeria is an exporter but also a Hugh consumer as well as it has little to no domestic refining capacity to match with its demand. Ultimately, there comes a point where higher prices may be damaging to everyone.
1. What does it mean for Nigeria?
High freight costs into Europe is another factor pressuring Nigerian crudes. Although Suezmax freight rates has fallen since peaking at multi-year highs late November, freight rates were still higher year on year. The West Africa to UK Continent trip was assessed at $10.11 per metric tonne last. month, according to S&P Global Platts data, compared with $6.95/mt on March 5, 2018.
“March [Nigerian value] was over-hyped and there appear to be pressures on competing Mediterranean grades that will affect Nigerian [April crude]. Urals, CPC, Sahara, and Libyan…especially as El Sharara is expected to be back,” a market source said. So if prices rise and Nigeria fails to find new markets for its crude, in the future rising prices will affect the West African giant negatively.
2. What does it mean for global growth?
The impact will vary. Rising oil prices will hurt household income and spending and it could accelerate inflation. As the world’s biggest importer of oil, China is vulnerable, and many countries in Europe also rely on imported energy. Seasonal effects will also impact. With the Northern Hemisphere summer approaching, consumers can switch energy sources and scale back usage. A slowing world economy will also hurt demand and by extension keep a lid on prices.
3. How can the world economy absorb oil at $100?
For a sustained hit to growth, economists say oil would need to hold above $100. It also depends on dollar strength or weakness, given crude is priced in greenbacks. Analysis by Oxford Economics found that Brent at $100 per barrel by the end of 2019 means the level of global gross domestic product would be 0.6 percent lower than currently projected by end-2020, with inflation on average 0.7 percentage points higher.
“We see increased risks of significantly higher oil prices,” Oxford economists John Payne and Gabriel Sterne wrote in a note. “In the short-run, it is likely the supply impact will be offset by higher production elsewhere, but the market is tightening and all it would take is one more shock to supply and oil could reach $100.”
4. How will Iran and Trump impact the market?
An upending of global oil trade around the Iran-Trump spat could continue to have a sizable impact on financial markets, as the affected supply is as much as 800,000 barrels a day. Uncertainties around availability have already whipsawed oil markets. And the political sensitivities of these developments have other markets bracing for volatility. Trump has pledged to help, alongside Saudi Arabia and the U.A.E., those needing to shift orders from Iran to another supplier. But U.S. claims that its domestic supply can help offset the loss are a high bar to meet, given that the daily American output for similar crude is about a quarter of Iran’s.
5. Who wins from higher oil prices?
Developing and Emerging economies dominate the list of oil-producing nations which is why they’re affected more than developed ones. If Nigeria can find new markets to see its oil, it will be a great spiral of events for the west African giant. The increase in crude prices will increase revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment. Other winners along side Nigeria will include Saudi Arabia, Russia, Norway and Ecuador according to analysis by Nomura.
6. Who loses?
Emerging economies nursing current account and fiscal deficits run the risk of large capital outflows and weaker currencies, which in turn would spark inflation. That in turn will force governments and central banks to weigh up their options: hike interest rates even as growth slows or ride it out and risk capital flight. losers might includes Turkey, Ukraine and India.
7. What does it mean for the the U.S. economy?
While American oil producers try to take advantage of any sales boost from customers moving away from Iran, the broader U.S. economy won’t necessarily see benefits with oil price tags as high as $100 a barrel. It would be a squeeze on American consumers that are the backbone of still-steady economic growth. Prices at the gas pump already have risen more than 7 percent this month to $2.89 a gallon, which could weigh on retail sales that jumped in March by the most since 2017. And if things go awry in global oil markets, there’s risk that political blame shifts back to the U.S. for the sanctions, which could mean backlash via investment or other channels that threatens economic stability.
7. What does it mean for the the Nigerian economy?
Nigerian oil producers will also try to take advantage of any price increase and try to attract customers with its quality crude. The Nigerian economy will see benefits if they can find new markets, which will bring in more revenue. The revenue will enable the government enact a good subsidy to prevent Nigerians from the hike in the international markets.
However, currently it is a little bit gloomy for Nigerian local producers as The Nigerian National Petroleum Corporation (NNPC) has said that it would no longer sign off any gas project without plans for gas flare out, in a statement. This has presumably pushed Mobil who intends to sell a suite of oil and gas fields it holds in Nigeria, and has commenced talks on the sales as it focuses on new developments in United States’. shale and Guyana. According to inside sources who were briefed on the divestment plans: “Exxon is actively divesting in Nigeria.” The discussions, it noted are focused on a number of onshore fields Exxon shares in joint ventures with NNPC, including oil mining leases (OML) 66, 68, 70 and 104. Exxon’s share of oil production in those fields reached 120,000bpd in 2017, it added. Similarly, Exxon it reported is also weighing the possible sale of stakes in offshore fields in Nigeria, and is looking into offering for sale assets in Equatorial Guinea and Chad.
While the Nigerian government has in the last decade supported a drive by domestic firms such as Oando, Seplat and Aiteo to expand their operations in the country as international companies including Shell sought to lower their presence due to oil spills resulting from pipeline sabotage, Exxon recently announced plans to boost its capital spending from $26 billion in 2018 to $30 billion in 2019 and up to $35 billion next year as it seeks to develop oilfields in Guyana and the U.S. Permian basin as well as gas projects in Mozambique and the U.S. Gulf Coast.