OREANDA-NEWS. December 16, 2015.  “It is a buyer’s market.” This phrase is omnipresent on most oil trader’s lips these days as crude oil prices continue to slide. None typifies this better than the current state of the Nigerian crude oil market. Overhang, glut, oversupply, unsold barrels, are some of the words most associated with Nigerian crude.

Rewind to almost a decade ago: Nigerian crude was every refiners’ oil of choice. Most of them wanted to refine Nigerian light sweet oil in order to produce a substantial amount of middle distillates and gasoline, the profit-making products for refineries.

Now fast forward to the present day. Nigerian crude has lost its appeal. With the growing pace of technological advancement in refineries that can take a greater variety of crude grades, Nigerian crude is no longer the talk of the town.

In the past six years Nigeria also lost its biggest customer, the US, which now buys only a small amount of Nigerian crude oil due to the dramatic rise in domestic shale production. And Nigeria has still not been able to adapt to this loss.

This is not a good time to be selling Nigerian crude, a situation exacerbated by the downward spiral in oil prices. ICE Brent fell below \\$40/b this past week for the first time in almost seven years, and with Nigerian crude differentials trading at 10-year lows, the future for Nigerian crude doesn’t look bright.

A large amount of Nigerian crude exports, which have ranged between 1.9 million and 2.15 million barrels per day this year, struggle to sell every month. Refiners and crude oil buyers have a lot of different crudes to choose from, especially in this glut, which is dominated by largely light sweet crudes. This is why there is currently a lot of Nigerian crude floating on ships with a significant amount finding homes in storage tanks rather than in refineries.

Complex refiners look at price over grade

As a trader of Nigerian crude oil said recently: “About a decade ago, quality of the crude was everything, now it is all about the price.” Traders like him and others have said the only way Nigerian crude can compete or fight for market share in an oversupplied and fiercely competitive market is with price.

Nigeria’s state-owned oil firm Nigerian National Petroleum Corp., which sets the Official Selling Price (OSP) for the various Nigerian crudes each month, has been reactive rather than proactive in the current market.

Traders have said heavy sour crude producers in the Middle East, like Iraq and Saudi Arabia, have adapted faster to the current crude glut by aggressively lowering their OSPs to make them more appealing to refiners. This has paid off for them as almost all of the Iraqi and Saudi Arabian crude cargoes sell steadily every month, going straight to refiners or end users. It is high time NNPC and its crude oil marketing department pay heed to this strategy. If not, the overhang will continue to linger.

The majority of Nigerian crude oil travels to Europe, a region where oil demand is on the decline, and this also doesn’t bode well for Africa’s largest oil producer. Out of the five biggest global crude oil importers — China, US, Japan, India, and South Korea — it is only really India that buys a significant amount of Nigerian crude. Nigeria needs to attract countries or regions where crude oil demand is on the rise.

The 2015/2016 NNPC crude oil term contracts are due by the end of this year, and including some of the world’s biggest importers would go a long way in turning around its fortunes.

Nigeria needs to find innovative ways to market its crude to new buyers. Five years ago, no crude from the North Sea would flow to South Korea, but the European Union and South Korea signed a free trade agreement almost four years ago, and now Forties crude from the United Kingdom regularly flows to South Korean refineries — and sometimes even to China. Nigeria needs to be inspired by this example and find more customers.

There is another model Nigeria could follow, which would be to develop its refining industry and become a key oil products exporter. Having a cheap crude available could yield significant margins, akin to what the US has achieved.

But Nigeria’s downstream sector is in a sad state of affairs with all of its four refineries currently shutdown. The poor performance of these refineries has forced Nigeria to import almost all of its domestic fuel needs, at a very large cost to the country.

Nigeria’s oil marketers need new ideas and reforms, as it looks like this buyer’s market we find ourselves in is not going away anytime soon. — Eklavya Gupte