Citing tough environment, Nigerian crude traders switch to swap deals - BUSINESSDAY

SEPTEMBER 14, 2018


A new regional swap market has emerged on the West African sub region, as oil traders challenged by a tough operating environment worsened by competition from shale producers, are increasingly turning to cash-settled swaps to speculate on prices and eke out profit.


So far in the arrangement, 8 million barrels of oil have been exchanged, according to data compiled by Bloomberg. The terms of the deal allows oil buyers to exchange a fixed price for a floating one published by SP Platts, the company that issues prices used to settle physical crude trades, and make a profit from the difference.


“We are entering a very crucial period for the oil market,” warns Paris-based International Energy Agency (EIA), an energy think tank, who in its latest oil market report, said the global oil market was entering a tight period characterised by increasing supply outages from Venezuela and Iran and limited capacity to meet outages, which could drive prices beyond buyers tolerance level.


“The point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be ‘easy’ to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions,” the IEA cautioned in a report released September 13.


The swaps, used to hedge or speculate on prices, are based on a basket of four Nigerian grades: Qua Iboe, Bonny Light, Forcados and Bonga, which are among the largest export grades from the Nigeria according to Bloomberg report.


SP Platts in a June report warned that Nigerian crude grades which are light and low in sulphur would see intense competition for markets in Europe and Asia from shale producers who are turning on the taps, producing crude grades with similar properties.


Nigeria has an uphill climb already as the United States, last week upstaged Saudi Arabia and Russia to become the world’s largest crude oil producer. US output reached nearly 11million barrels per day and the EIA forecasts that the country’s oil production will stay ahead of Russia and Saudi Arabia through 2019.


“It’s an historic milestone and a reminder: Never bet against the US oil industry,” Bob McNally, president of Rapidan Energy Group, a consulting firm told CNN. He attributed the US oil production feat to technological improvements, “supported by ample capital to invest, and the ingenuity of American oil drillers.”


But this increased output will need to find markets in Europe and Asia where refiners are increasingly becoming spoiled for choice.


“For Nigeria, apart from internal risk, another risk is competition from similar crude grades and this will keep growing as new light crude grades enter the basket,” Andrew Bonnington, director, Strategic Market Engagement for Europe & Africa at Platts said at the company’s Lagos Oil and Energy forum held recently,


S&P Global Platts is including new light crudes in its basket from which oil prices are benchmarked thereby resetting the balance of global oil prices as this enhances trade on these crude grades.


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