The real oil market is killing Nigeria. 

One of the country’s benchmark grades, Bonny Light, fell to about $12 or $13 a barrel this week, according to traders monitoring the West African market. The deeply loss-making level shines a light on a chasm that’s emerged between real crude prices that producers are fetching, and headline futures contracts like Brent, which stood at about $28 on Friday.

Swathes of Europe, the staple market for the West Arican nation, have gone into lockdown to combat the coronavirus.

Even with prices deeply depressed though, long-haul buyers in Asia don’t want cargoes because there’s also freight to pay and no real need for the barrels since demand has been obliterated. For Nigeria, that could become a particular challenge, since the country has very little space to store supplies if they’re unwanted.

“That seems to be the first real point of a bust, with no onshore storage, so it has to go onto ships,” said Spencer Welch, a director on the oil markets and downstream team at IHS Markit.

The prices are well below the cost of producing oil in Nigeria -- about $22 a barrel, and lower still than the the nation’s fiscal breakeven, assessed by Fitch Ratings about $133 a barrel.

Nigeria depends on crude sales for half of government revenues and 90% of foreign exchange earnings.

While Nigeria’s plight is playing out across the world, with actual oil cargoes often trading at huge discounts to headline futures, the pain is particularly acute for Africa’s biggest economy because of its oil dependence and an inability to store. According to IHS Markit, Nigeria would run out of storage space quickly if it couldn’t find ships to take its oil.

Real Market

The country sells its barrels at premiums or -- more recently -- discounts to Dated Brent, a physical North Sea crude price that’s published by S&P Global Platts. Dated Brent was at about $18.10 a barrel on Wednesday, and Bonny Light was $5.70 less than that, according to traders. That works out at about $12.40.

An official from the country’s finance ministry refered calls to Nigerian National Petroleum Corp., the state oil company.

”The market is simply responding to the forces of demand and supply precipitated by the COVID-19 pandemic,” NNPC said in a statement. “We are working assiduously to guarantee a steady market for our crude in the short and long term.”

When headline oil futures were around $22 a barrel last month, Mele Kyari, the boss of the state oil company, said that Nigeria would be “out of business” at such levels, according to a local media report.

The weakness afflicting Nigeria is global. Spot supplies of Canada’s Cold Lake were bought by a Chinese refiner at a discount of between $8 and $9 a barrel to ICE Brent on a delivered basis, while an oil major sold a shipment comprising Alaskan North Slope and Brazilian grades at a $5.50 to $6 discount, said traders who buy and sell crude in Asia.

Super Contango

The disconnect between physical cargo prices and futures markets is partly about timing, and partly about the dynamics of individual crude grades. The oil market is trading in what traders call a super-contango, meaning more-immediate prices are at huge discounts to later ones.

In the futures market, the nearest Brent contract is for June, which is about $3 cheaper than July. But with April barrels still available, those need to price at even deeper discounts to find buyers.

Traders of West African oil say that about 10 million barrels for sale in April remain unsold with just 13 days of the month to go. For May that’s as much as 60 million barrels. That represents a very slow pace of sales, and the region’s June loading programs are just starting to be released. The vast majority of unsold supplies are Nigerian rather than Angolan, and a big cause of the glut is because traditional European buyers have stopped purchasing because demand there has collapsed.

For some, the prices still aren’t low enough for a crude that’s much sought after in normal market conditions.

Pertamina PT, the Indonesian oil refiner, decided not to award a tender to purchase four months’ worth of cargoes of mostly West African oil because of weak demand and prices that just aren’t low enough, according to people familiar with the matter.

It’s not just West African oil markets that are struggling in the Atlantic Basin either. With so much European demand halted by the virus, grades in the North Sea and the Mediterranean are also pricing aggressively to clear.

“It has nowhere to go,” said Olivier Jakob, managing direct at Petromatrix GmbH. “It’s really a problem of demand. It’s not just affecting the supply from West Africa. I think the North Sea is also problematic, and the Med is at a heavy discount.”

Bloomberg