The submersion of East Asian markets into coronavirus-induced recession has pulled down several major oil producers, most notably Nigeria whose breakeven price is well above $100 per barrel (Fitch puts it at $144 per barrel). Depending on its crude production for 60% of government revenue, Nigeria was confronted with a double whammy of falling oil prices and general economic decline – to the extent that Lagos has applied for some 7 billion in SARS-COV-2-related emergency funds provided by the IMF and the World Bank. Nigeria’s credit ratings were downgraded by both S&P and Fitch (Moody’s kept the negative outlook without downgrading) and things seemed as if the most populous country in Africa might be in for some serious trouble.

Part of the anxiety was due to the fact that Nigeria agreed to participate in the unprecedented Russia-Saudi Arabia-United States crude production curtailment and vowed to drop output levels by some 300kbpd to an overall level of 1.4mbpd (do not be confused by the ostensibly higher level of crude exports, Nigerian condensates are out of the question and will remain left out from the deal itself). The Nigerian Oil Ministry even went as far as to say that they expect 2.8 billion in additional revenue from being part of the OPEC+ deal. Initially, however, whilst Nigeria’s commitment to the deal entirely laudable, it seemed as if OPEC+ was removing only a fraction of barrels that entered the market.

Now Nigeria can finally let off a brief sigh of relief as the return of China has boosted both export prospects and grade differentials. Led by Saudi Arabia, leading Middle Eastern producers engaged in a hypercompetitive price war and despite most of West African crudes remaining one of the most optimal sources for IMO 2020-compliant products, Nigerian crudes struggled to reach their traditional market outlets in Asia. The intense price pressure has rendered West African remarkably attractive after it drove them to multi-year lows – even IMO 2020 favorites like the Equitorial-Guinean Zafiro or Chadian Doba went as low as -7 against Dated Brent, not to speak of the manifold light sweet grades West Africa wields.

Chinese buyers would generally buy only 1-2 cargoes from Nigeria yet boosted by the economic profitability of West African countries in April there were 4 vessels sailing off for China and the May 2020 tally went even further to a whopping 7 cargoes, totaling 9 MMbbls. Interestingly, both April and May witnessed an Egina cargo loading for China, despite it being a staple diet of Northwest European refiners. This reconfiguration of the usual state of things (albeit temporary) is partially due to the fact that Indian demand, routinely the largest magnet for Nigerian grades, has subsided somewhat as the SARS-COV-2-induced lockdown took place there with a delay of several months. All this means that Nigerian cargoes arriving to China this June will mark the highest-ever level, whilst West African exports to China will be the highest since November 2018.

As impressive as the Nigerian export surge to China seems, it would not have happened without extremely depressed grade differentials. The combination of Middle Eastern producers cutting OSPs and the coronavirus demand slump has elicited an unprecedented drop in Nigerian differentials – from March to April (the OSPs are usually published around the 15th of the preceding months) almost every single grade has witnessed a $4-5 per barrel month-on-month decline. Moreover, differentials were plummeting even harder in terms of real market prices (since OSPs play a largely indicative role) – after most flagship Nigerian grades moved to discounts against Dated Brent in March, it took them more than a month to bottom out in the $-7/-9 per barrel interval to Dated.

The official selling prices of Nigerian grades present a fairly truthful picture of their current pricing levels. If the OSPs of light sweet, predominantly IMO 2020-compliant, Nigerian grades drop in May 2020 to $-3 or even $-4 per barrel against Dated Brent, the lowest ever recorded, then surely something is not right. Yet as the June OSPs start to transpire one can see that a bounce back of differentials is already taking place, Nigeria’s flagship export streams like Bonny Light or Qua Iboe are both assessed at $-1.05 per barrel to Dated, with the rest moving even stronger towards a flat Brent assessment. As Europe comes back from a multi-month lockdown season, it will rediscover its appetite for West African crudes, hence the probability of the Nigerian export surge to China becoming a long-term trend (especially with the strengthening diffs) is shrinking.

Nigeria’s way forward will not be easy – its exports possibilities will be subdued for a couple of months by its participation in OPEC+, all its differentials will not go back to pre-corona territory that easily. This will be especially true of high-gasoline-yield very light grades, whilst grades with a more balanced mid-distillate yield should become the best performers of this summer. Nigerian exporters would also need to keep in mind the risk of increased competition – to name just one example, the Indian refiner IOC has awarded in a recent purchase tender in May to the American WTI although almost everyone expected it to buy Nigerian.

Oli Price