Analysis: Nigeria in OPEC October Oil Market Report

The OPEC Monthly Oil Market Report (MOMR) covers major issues affecting the world oil market and provides an outlook for crude oil market developments. This commentary by Peter Okediya highlight the parts relevant to Nigeria’s oil markets and production comprehensivel

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Economic Outlook

The OPEC October MOMR (the report) analysis of Nigeria’s economic performance presents a picture of trade balance and inflationary pressures arising because of subsidy removal and devaluation of the official exchange rate. The report noted that there was significant improvement in Nigeria’s trade balance during the second quarter of 2023. This is attributed to two key factors: the surge in non-oil exports and a notable decline in imports. The report attributes the decline in imports to a weaker exchange rate, which incentivized the domestic production of goods, reducing the reliance on imported products.

The analysis further reveals that inflationary pressures have been on the rise. The annual inflation rate climbed to 25.8% y-o-y in August marking the highest rate since September 2005. The inflation rate surge is traced to ongoing reforms, including the removal of fuel subsidies, inaccessible foreign exchange, and challenges in food producing regions. The removal of fuel subsidies in particular has been a significant factor contributing to this inflationary trend. Additionally, core inflation increased to 21.5% y-o-y in August. In response to the inflationary pressures, the Central Bank of Nigeria raised its benchmark interest rate by 25 basis points to 18.75% in July 2023. According to Nairametrics, Nigeria’s inflation rate rose to 26.72% in September 2023 while the food inflation rate rose to 30.64%.

The report suggests that challenges remain on the horizon. These include rising inflation, decline in the spending power of Nigerians and pressures on the exchange rate which may leave the Naira gasping for breath. Nonetheless, the report is optimistic about the potential for foreign investments provided the ongoing reforms successfully enhance macroeconomic stability and stimulate domestic industries.

Oil Supply: Nigeria’s Crude Oil Production

In addition to the economic outlook, the report provides insight into oil supply and crude oil production of different regions. However, our focus in this newsletter will be on Nigeria.

The report shows a notable increase in total OPEC-13 crude oil production, which averaged 27.75 million barrels per day (mb/d) in September 2023. This represents a month-on-month increase of 0.273 mb/d. Nigeria was identified as one of the prominent contributors to the surge in production.

Nigeria averaged 1.39 mb/d in September. This marks a substantial increase of 0.141 mb/d compared to its August production level, which stood at 1.249 mb/d. The report does not address the specific factors driving the increase in Nigeria's crude oil production nor address its impact on oil prices, but it is worth noting that a surge in supply can exert downward pressure on prices if demand remains constant. This can influence the economic stability of countries relying on imported fuel. Considering the security concerns in Nigeria’s petroleum industry and global fluctuating oil prices right now, additional effort must be exerted to increase production sustainably in the long term.

Product Markets and Refinery Operations (refinery margins)

The report highlights a significant decline in global refinery intake, indicating a 1.3 mb/d decrease in September. This decrease is noteworthy as it brings the average intake down to 81.1 mb/d from the previous month’s 82.5 mb/d.

This segment of the report also examines refinery margins, specifically in Rotterdam. It notes that refinery margins against Brent have stepped down from year-to-date highs recorded in the months after four consecutive months of gains. The decline in refinery margins reflects the profitability of refining operations. The decline in fuel demand in the Atlantic Basin is cited as a possible exacerbating factor. This could point to changing consumption patterns, but the fact that this decline occurred after four months of growth gives assurance of it getting back stronger.

A key factor impacting the demand side pressures mentioned in the report is the subsidy removal and subsequent retail price hikes in Nigeria. The subsidy removal has had far-reaching implications, not just for the domestic market but also for global product markets, especially in regions like West Africa. The report suggests that the decline in fuel exports to West Africa by around 28% is a direct consequence of the subsidy removal.

Product Market (European Market)

Gasoline crack spreads in Rotterdam decreased, affected by subdued demand from the US and West Africa, as gasoline exports to West Africa were reported to have declined by around 28% following the fuel subsidy removal in Nigeria.

Gasoline crack spreads refer to the difference between the cost of crude oil and the price of the gasoline produced from it. The decrease in gasoline crack spreads in Rotterdam is a critical indicator of the challenges being faced in the European gasoline market. Such a decrease often reflects a mismatch between supply and demand dynamics, which are influenced by various factors, including market conditions, regulations, and economic changes. Also, the report points out that the decline in gasoline crack spreads is partially a result of subdued demand from the US. This could be associated with changing consumer behavior due to various factors, including a shift towards electric vehicles and remote work arrangements, leading to reduced gasoline consumption.

The report frequently mentioned the fuel subsidy removal in Nigeria. It is a good illustration of how policy decisions in one country can have a ripple effect on the international market. Nigeria has historically been a major importer of gasoline, and the removal of fuel subsidies has led to a significant increase in domestic gasoline prices, thereby reducing the country's demand for imported gasoline.

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