In this episode of The Crude Report, a podcast series on global oil markets, we look at the drop in Nigerian crude demand to Europe and the role of China in relieving the pressure.
Nicola De Sanctis, Senior Crude Oil Market Analyst, comments on how Nigerian crude demand to Europe has been severely dented, being pushed out by a steady flow of US crude exports on top of weak European gasoline margins. But although Europe isn’t showing signs of an imminent recovery, some relief may come from China
Jessica: Hello and welcome to Argus' The Crude Report, a podcast series on global crude oil markets. This is Jessica Tran for Argus Media.
As you can imagine, there is still very tight competition for the weak crude oil demand that's out there. Nigeria is unfortunately feeling the heat as traditional buyers of Nigerian crude, such as Brass River and Forcados, have opted for the cheaper US crude of similar quality. One trader was reported to have said that, "There are too many US crude barrels in Europe once again," and added that Nigerian crude sellers will have to slash their offer levels to reinvigorate any buying interest.
Here with me is Nicola De Sanctis, Argus' senior reporter covering West African crude markets and editor for our daily West Africa Oil report. Thanks for joining our podcast, Nicola.
Nicola: Oh, thanks, Jessica. And hi, everyone. Thanks for having me on this podcast series.
Jessica: It'd be helpful if you started with a quick overview of what's happening in Europe. I understand everyone across the globe is still coping with Covid, but in different ways.
Nicola: Yes. Well, indeed, the Covid-19 pandemic has had a tremendous impact on crude demand in Europe. This has affected one of its main sources, which is West Africa, and in particular, Nigeria. The picture for Nigerian crude, unfortunately, for Nigerian sellers, doesn't look too rosy, as very few September cargoes have been sold into the region. And with the October trading cycle expected to kick off either tomorrow or early next week, which means that October loading cargoes will start trading next week, and most sellers will have to discount their September cargoes in order to find an outlet for them.
The fuel crude demands in Europe have been badly affected by what appears to be, like, a second wave of Covid-19 infections with refining margins still largely below pre-pandemic levels, especially jet fuel, of course, and also cracks for gasoline remain highly volatile. The Eurobob gasoline margins, which are assessed by Argus, have so far averaged just below $2 premiums to North Sea Dated, and they've jumped all around. They've jumped from 50¢/bl discounts to the benchmark to premiums above, like, $3/bl. And the $1.82, actually, that's the average. The $1.82/bl premium to North Sea Dated so far in August compares with the $2.62 premium of last month and a whopping $6.11/bl in February and $4 or almost $5/bl in January.
Jessica: Yes. That's a quite a wide range. And so, I understand that light sweet Nigerian crude has similar qualities to US crudes like WTI, and everybody's just competing for as smaller field of buyers. How competitive has Nigerian crude been in this environment?
Nicola: Well, they have been competitive, but not so much lately because let's just say that sellers have had, like, very little luck in selling September cargoes of Nigerian crude into Europe. This is because, like, the sliding values for Rotterdam-delivered WTI crude and also falling freight rates for eastward transatlantic journeys for Aframax tankers have prompted European refineries to basically shun the Nigerian grades in favor of light sweet crude, as you said, from the US Gulf.
Nowadays, cargoes of WTI for October arrivals in Rotterdam are being assessed apparently to be dated on a CIF basis, which is cost, insurance, and freight covered by the seller, and this compares with premiums close to $3/bl back in January. So, this is obviously a massive fall, and obviously, buyers are taking advantage of that. For instance, no buyer stepped up last week for Vitol’s 950,000 bls, a combination of Brass River and Forcados, as you mentioned before. The two parcels were offered premiums to North Sea Dated of $1.65/bl for Brass River and $1.95 for Forcados on a CFR Rotterdam basis for arrival between end September and early July...and early October, sorry. The two CFR offers equate to FOB premiums of roughly 23¢ and 33¢ respectively, which is quite low. And that happened last week. So, since then, differentials have dropped for most of Nigerian state grade with values for really only a handful of streams that were floating above the benchmark.
Flagship, or I would say key streams, such as Qua Iboe and Bonny Light, have fallen to discounts of 20 or even 30¢/bl. They could even go lower, I'm assuming. And the highest value grade remains Nigeria's newest stream, Egina, which is valued at around, like, 70¢/bl...a premium of 70¢/bl. And this is quite low for Egina, which is used to be above the benchmark by around $2. Basically, the lack of European demand as a result, like right now, around half of the 52mn barrels of Nigerian crude that was scheduled to load next month in September are still looking for an outlet a few days ahead of the start of the October trading cycle, as I said.
So, the figure also includes all six September shipments of flagship Qua Iboe grade, which is largely favored among European refiners. Oddly, the forthcoming release of the first October schedules, expected by the end of the week, will wait even further on values, as sellers will need to discount their cargoes if they don't want to incur a loss according to market participants. So, as you can see, the whole picture for Nigerian sellers is not great.
Jessica: It doesn't sound very rosy, but I mean, is there anything for Nigerian suppliers to look forward to?
Nicola: Yes and no. I'll say that, for now, demand from Europe is not showing any sign of imminent recovery, but unexpected help might come from China. Chinese refiners are ramping up intake of US crude over the past couple of weeks, and this is despite the devastating floods which have hit the country in June and July. The demand from China could, in theory, tighten the availability of US crude exports and hopefully free up some demand for Nigerian grades in Europe. As of right now, we see that there are around 12 VLCC tankers, very large crude carriers, that are supposed to carry more than 835,000 bl of crude to China and are set to depart in September. And that is just, like, a preliminary tracking for next month. And this compares with just six tankers estimated to sail for China in August which, as you can see, is more than double. I'm guessing that it's gonna be, like, more than double the amount.
So, this could help demand for Nigerian crude, but I'm not seeing the September loading problem clearing anytime soon, and this is because, like, Indian refiners, such as, like, state-owned IOC and HPCL, are already looking at October loading cargoes. So, the last time that IOC, which is one of the main buyer for Nigerian crude in East Pacific or around the world, I would say. But last time they retendered for September loading cargoes was back on 22nd of July, and in its most recent tenders, it only bought October loading cargoes. At the same time, HPCL as well, it also tendered for 2mn bl of mainly light sweet crude arriving on 10 November, but the refiner actually closed the tender without taking any cargoes of West African crude. it is important to remember that the refiner HPCL also lists the grades from the UAE, such as, like, Murban or Algerian Saharan blend, but mostly US WTI Midland and Wyoming Sweet crude.
So, I do not expect values for Nigerian crude to regain ground anytime soon. European demand might rebound for distressed September cargoes with sellers forced to discount further the crude. The OPEC+ quota for Nigeria might help. It is now set at roughly 1.5mn b/d for the rest of year. This might provide some support, but I doubt it would be enough to see grades trading steep differentials like they used to do before the Covid-19 pandemic.
Jessica: Okay. Thanks for the overview of the Nigerian crude oil markets, Nicola. For daily prices, news, and analysis for over 80 internationally traded crude streams, consider subscribing to Argus Crude, or for a more in-depth view of West African crude oil markets, consider subscribing to the Argus West Africa Oil service. You can find more information on these services at www.argusmedia.com. Thanks for tuning in, and we look forward to your joining us on the next episode of The Crude Report.