The Crude Report: The effects of Opec+, vaccines and piracy on WAF markets

Author Argus

Will a new year bring WAF markets old concerns?

Our west African crude market reporter Nicola de Sanctis talks the three biggest things the WAF markets are looking out for.

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Transcript

Jessica: Hello, and welcome to The Crude Report, a podcast series from Argus on global crude oil markets. This is Jessica Tran for Argus Media.

Sure, we could reflect on 2020. But I would venture to say that many have been looking toward 2021 for some time now. In this episode, we'll be doing the same, but for west African crude markets. How will 2021 look for this region as Covid-19 vaccinations are distributed throughout the world, handling the fresh OPEC plus quota agreement, and managing the recent rise in piracy activity, particularly in the Gulf of Guinea?

Joining me to discuss this today is our west African crude market reporter, Nicola De Sanctis. I know everyone is looking to settle down for the year, so I really appreciate your joining me today, Nicola.

Nicola: Hey, Jessica. Thanks for having me back in the podcast.

Jessica: This has obviously been a very challenging year, which is ending with the highly awaited rollout of Covid-19 vaccines around the world. Could you tell us what impact the new vaccine might have on the west African crude market?

Nicola: Sure. So, at the moment, my expectations are that vaccine will be key in reviving the demand from Europe, because buying interest from Asia-Pacific has already recovered - that happened a few months ago, I would say starting from summer. China and India are now taking about 1.2mn b/d and about 500,000 b/d, respectively, so demand from Asia is there. And also because the resumption of economic activities in India has pushed the main refiner, IOC, towards a buying spree in early October. And this buying spree is yet to abate, to be honest. So, we're still seeing IOC taking a lot of Nigerian crude.

So, as we see, Nigerian grades accounted for 86pc of the exports to India from west Africa, which is a massive percentage - up from 50pc in October and in September. The vaccines, the only thing that they can do, I believe, is just going to boost demand in Europe. So, we don't expect exports to Europe to reach the 1mn b/d recorded over the summer. Over the past two months, in October and November, there were about, like, 850,000 b/d. And we expect that the figure will be significantly lower this month or the first quarter of the year.

As you know, west African crude cargos usually trade between one and two months in advance, and we're not seeing any spike in demand from Europe for January and potentially February cargos yet. What I expect is that should the rollout of vaccine help resume economic activities in the region, refinery margins and demand in Europe will likely improve in the second quarter of 2021 or towards the end of the second quarter of 2021, I would say.

In such an outlook, we certainly favor Nigerian grades because European refiners usually scoop up around half of Nigerian monthly crude output with the other half split between India, South Africa, Indonesia, and the Americas. So they're the main buyer of Nigerian crude. And the end of the second quarter usually coincides with the start of the driving season in Europe. And we might see margins for gasoline, diesel, and jet fuel perhaps rebound towards the end of the second quarter. So let's see, because usually Nigerian medium and light sweet grades are highly sought after feedstock for those oil products. So if the buyer chains actually will boost demand, then we'll definitely see, like, a resumption of exports to Europe that could be in the range of around like one million barrels a day or even higher towards the end of the second quarter 2021.

Jessica: And next month, it looks like the Opec+ group will also raise its collective production quota by about 500,000 b/d. How will that affect the west African producers?

Nicola: Oh, it will have, like, huge impacts, I believe. So every west African producer, we're talking about like probably six or seven countries, they rely heavily on oil export revenues. So the decision was obviously well received. I think mostly in Abuja, Nigeria, because Nigeria is among one of the few countries in the region that could easily pump out higher volumes of crude whereas there are some countries such as Angola where production is declining. So for them, it might not make a huge difference, but Nigeria we're probably going to see some enthusiasm throughout the market because they're gonna have...the new quota is about, like, 1.51mn b/d, which is not much higher than the 1.49 they had between July and December.

But in perspective, the increase might sound a bit more significant because it's 7pc higher than what they had for May and June. Because when they first decided to have production cuts, Nigeria was 1.41. Now it's going to be like 100,000 bls higher than that, 100,000 b/d, obviously, higher than that. So that could have, like, huge impact on the oil revenues for the countries, of course.

Similar increases will apply to quotas for Angola, Congo-Brazzaville, Gabon, and Equatorial Guinea, which are the other Opec members across west Africa. I believe that if you have European demand coming back and a higher Opec production quota, then Nigeria might be looking at quite a rosy scenario for, I would say, mid 2021. And I believe that the only issues at the moment, or perhaps over the next three or four months is going to be the resumption of light sweet crude production in Libya this, obviously, competes with Nigerian crude. And also, the continuous sabotage tax to the countries or facilities, and piracy activity in the Gulf of Guinea. So, I believe those two things might create quite a few bumps in the road.

Jessica: Yeah. And I guess you mentioned the piracy activity or sabotage attacks. Can you talk more about what's been going on, and especially, I guess, in the Gulf of Guinea over at the second half of 2020?

Nicola: Sure. To me, when I looked at the figures, it was quite astonishing. The pace at which the number of pirate attacks is rising is truly alarming, I would say. In the first three quarters of this year, there were 134 attacks in the Gulf of Guinea. Not just the oil tankers, but to vessels in the Gulf of Guinea. And this is up from under 118, 119 in the first three quarters of 2019. This might not sound, like, significant, but we're talking about, like, almost four attacks a week. This basically means that on a given day, you're more likely to hear about an attack than not. And not many people know that the Gulf of Guinea actually accounts for roughly 90pc of most kidnappings worldwide. As a matter of fact, like, a containership was actually attacked just this morning, and a second attack was recorded, like, less than 24 hours ago. So pirates are also targeting not only oil tankers or containerships, but also floating production storage and offloading vessels, usually known as FPSOs.

In early July, pirates attacked the Sendje Berge FPSO offshore Nigeria, kidnapping nine local workers. The nine workers were released only on 10 August, so more than a month. In November, we heard that the government of Equatorial Guinea, after several incidents, decided to reach an agreement with the Ministry of Defense to fight piracy in the country's waters. In May, the representative of the oil industry in Nigeria also agreed to create a working group on maritime security along with the Nigerian Navy and the Nigerian MASA is the Maritime Administration Safety Agency, so to prevent piracy.

But the fact is Nigeria is also battling with another endemic problem that the country has, which are tax to the oil and gas facilities in the country's trust pipelines or terminals. Just last year, more than 714 oil spills were recorded. And this is massive because like the vast majority of it, of the spills were caused by attack-related activities. I usually check the updates from the Nigerian Navy and Nigeria armed forces. They usually find and dismantle roughly, I would say, 10 illegal refineries per week in the south and southeast region, along with thousands and thousands of illegal oil refinery products obviously. So, it's alarming that the attacks in facilities are not only related to theft, but also just pure sabotage.

Less than a month ago, I believe the sabotage has led to Eni from Italy declaring a force measure at its brass terminal in Nigeria. And that led to a loss of flows of crude to the terminal of around 30,000 b/d. And that was the result of like a dynamite attack. So it wasn't just to steal, it was just to affect production. And that is also quite alarming because more recently, the leaders of the militant groups, we've got several in the Niger Delta, this one is called the Niger Delta Liberators, I believe, has issued like fresh threats to Chevron, Shell, and also state-owned NOC facilities in the region for the government not meet their demands to allocate more funds and efforts to human capital development projects in the region.

So it is quite concerning. All these issues combined, I believe, we're talking about piracy and oil pipeline attacks, could potentially put a dent in buyers' confidence in Nigerian crude, but also other west African grades. And who knows, in the long run, they might even lead refiners in Asia, in Europe to target competing grades from, I would say, less restive region. So, it remains to be seen whether the countries in west Africa will efficiently tackle these major issues.

Jessica: Now, there's a lot going on in west Africa. So thank you so much for kind of summarizing all of this on this podcast, Nicola, and I hope you have happy holidays.

Nicola: Oh, thank you very much. And to you too.

Jessica: For daily prices, news, and analysis for over 80 internationally traded crude streams, consider subscribing to the Argus Crude service. Or for a more in-depth view of west African crude and products markets, have a look at the Argus West Africa Oil service. You can find more information on both of these services at www.argusmedia.com. Thanks for tuning in, and please join us again on the next episode of The Crude Report.

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