2020 has been whirlwind for the global oil market, following the outbreak of the COVID-19 virus, which has hampered oil demand from one of the largest consumers of oil – China (13.1% of world demand). With the virus spreading across other key demand regions – Europe (14.4%) and United States (20.9%) – the outlook for oil prices is weak. While relations among OPEC+ was meant to provide support for falling oil prices, a failed agreement turned into a full-blown price war, with major oil producers offering significant discounts on their April Official Selling Prices (OSP).
In response to the lower global crude prices and to push out unsold cargoes, the Nigerian National Petroleum Corporation recently cut its April official selling prices (OSP) for Bonny Light and Qua Iboe, to dated Brent minus $3.29 and minus $3.10 per barrel, respectively. With Dated Brent currently at $26.8/b, a rough estimate shows that Nigeria will be selling Bonny Light crude for about $23.5/b and Qua Iboe crude for $23.7/b.
While the slash in crude grades might push out existing volumes, this reduction in price will hurt Nigeria’s future revenue coming from the NNPC. For context, Nigeria’s cost of production is estimated between $20.0/b-$23.0/b, which puts the current pricing at barely breakeven. Also, with other oil and gas operators in Nigeria exposed to the declining prices, royalties and taxes received by the government will come under significant pressure. In all, oil revenue in 2020 would not only be challenged but also significantly lower than the previous years.
United Capital Research