Oil prices are set to rise further as OPEC output cuts and American sanctions on Iran and Venezuela cause a “shortage” of the low-quality heavy crudes refiners rely on, says Russell Hardy, chief executive officer of Vitol Group.
But this is cold comfort for Africa’s biggest oil producer whose major crude grades are high sulphur crudes.
Hardy said in an interview with Bloomberg there is probably the potential for oil prices to be a little bit higher as oil supply is going to be pretty tight until the third quarter.
But much of this demand increase will benefit low-quality crude grades as US shale producers, along with other producers including Nigeria, are pumping huge volumes of the high-quality crude, feeding a growing glut that is bearing down on demand.
With an eye on the January 2020 deadline for the implementation of the new regulations from the International Maritime Organisation (IMO), where the sulphur limit for the shipping industry will fall to 0.5 percent among other calculations, including higher prices for sweet crude, refiners had made massive investments to build plants capable of processing large volumes of low-quality crude grades.
However, this calculation seems way off the mark as sanctions by the United States on Iran and Venezuela, two of the world’s biggest producers of low-quality crude, are seeing the refiners scrambling. OPEC cuts too will also shut in more cheap crude grades coming from Saudi Arabia.
“You have a squeeze on heavy supply probably for the next six months,” Hardy said in a Bloomberg TV interview. “The OPEC decision has meant there’s less available, the Iranian situation has meant there’s less available, and the Venezuelan situation now is adding to that.”
Bloomberg reports that the heavy-light crude conundrum is turning the oil market’s usual price patterns on their head as the heavy-light spread narrowed to an almost nine-year low earlier this month on the Brent-Dubai exchange of futures for swaps.
While this favours producers like Saudi Arabia and Iraq, who don’t produce much light-sweet, Nigeria prefers a market where the light crude reigns.
Nigeria badly needs higher oil prices to steer the 2019 budget benchmarked at $60 per barrel into realms of reality. President Muhammadu Buhari, when he received Ahmad Qattan, a Saudi envoy in Abuja, on February 20, said Nigeria could consider a reduction in crude oil production in support of efforts by OPEC to shore up the price.
“As a responsible member of the OPEC, Nigeria was willing to go along with the Saudi initiative in limiting output so that prices would go up,” Garba Shehu, senior special assistant to Buhari on media and publicity, said in a statement.
Shehu further said President Buhari wished that there was no need for cuts because of Nigeria’s large population and the need to secure more money, wishing the country could produce more. A price rally arising from geopolitical tensions in Latin America and the Middle East may reduce pressure on Nigeria to cut back on production.
However, oil prices continue to be susceptible to something as irrational as a tweet by America’s President. Trump sent prices reeling on Monday when he tweeted a criticism against OPEC, calling on the organisation to relax.
The tweet sent prices tumbling on Monday. WTI Crude was down 2.41 percent at $55.88, and Brent Crude was trading down 2.16 percent at $65.80.
Crude oil traders who sell the commodity in the international market have a keen grasp of developments in the industry and their judgments are usually respected. Vitol is the world’s largest independent oil trader and handles more than 7 million barrels a day – enough to meet the combined consumption of Germany, France, Spain and Italy, Bloomberg estimates show.
ISAAC ANYAOGU
