Bonny Light Crude Projected to Hit $55/b by December


Barrels of crude oil

Kunle Aderinokun
Analysts at FBNQuest, an economic research and investment banking arm of FBN Holdings Plc, has predicted that the price of Bonny Light crude oil at the international market would hit $55 per barrel at the end of this year and further projected that for 2017 Bonny Light would sell at US$60/b (average) and would hit US$70 per barrel at end-2017.

Bonny Light crude oil is a high grade of Nigerian crude oil with high API gravity (low specific gravity), produced in the Niger Delta basin and named after the prolific region around the city of Bonny.

The firm, which recently released its Economic Outlook for August, obtained by THISDAY, also put the average price of the Bonny Light crude at $50 per barrel.

“We see an average price for this year for spot Bonny Light of US$50/b, with US$55/b at end-year,” it said.

Noting that, “The price was below US$30/b as recently as January, “ FBNQuest stated that, “Our take is that the market had oversold following the international deal with Iran.” The pick-up, it however added, could only be “gradual since the global supply and demand dynamics will not be supportive until late 2017.”

FBNQuest noted that production losses (leakages) were “unparalleled” for Nigeria, a leading oil producer, pointing out that “In 2014 they reached up to 300,000 bpd, which would have been equivalent to the entire production from, say, Gabon. This year losses have soared with an upsurge in sabotage and militancy, climbing to 750,000 bpd on occasions.”

“For the uninitiated, we should explain that these huge losses are a combination of artisanal theft and larger criminal operations. A local act of “bunkering” can lead to the closure of a main pipeline and the declaration of force majeure. We see average output (including condensates) this year at 1.90mbpd, and so well below the 2016 budget assumption of 2.28mbpd. We assume a modest recovery in 2017 to 2.05mbpd on measures by the administration to tackle some of the worst production leakages and tighten security in the Niger Delta,” it explained.

FBNQuest explained: “The Saudi-led OPEC decision in November 2014 to leave its production quotas unchanged is having some impact. Some shale oil producers in the US are going out of business because they cannot compete at the lower prices, and many US banks have become less free with their credit. The picture is uneven, however, and some companies have stronger balance sheets than others in the fracking industry in North America. Nigeria is, of course, a member of the global village, and vulnerable to negative movements in world financial and trade flows.

“Its credit event in 2009 was, however, home-grown and caused by the failings of its own banks rather than borrowings from foreign banks. It also enjoys some insulation from those movements by virtue of its low external indebtedness, both public and private sector. For these reasons and because in production terms Nigeria is a non-oil economy, the damage from the slide in the oil price has been less acute than in, say, Angola or Russia.”

FBNQuest also expected the economy, which contracted in the first quarter (Q1) of this year, to also contract in the second and third quarters of the year. In fact, it projected that, “for the year as a whole, we see contraction of -1.2 per cent year-on-year.”

The firm expressed confidence that fiscal policy of the federal government will be “decisive”. Besides, it stated that, “sectoral reforms and the dramatic move on the exchange rate in June should also underpin an economic recovery.” As such, it forecast “growth of 2.5 per cent for next year, and a robust turnaround thereafter.”

FBNQuest, which pointed out that, “The healthy GDP growth through to 2014 was based in expenditure terms on robust household consumption,” however, stated that, “Given the paucity of indicators, we have noted the difficulty in testing this statement. The manufacturers are guided by their own very detailed and private research into consumption trends.”

According to the company, “Consumption growth has slowed as a result of insecurity in the north east, fiscal pressures arising from the slide in the oil price, currency devaluations (in November 2014, February 2015 and June 2016), and dull global growth. Unfortunately for Nigeria, the developed economy with the best growth prospects is the US, which has become self-sufficient in oil production.”

Also, the FBNQuest in its August edition on the research on the economy, expressed the need for the President Muhammadu Buhari-led administration to communicate better its policies and successes.

“We give the Buhari administration the benefit of the doubt, and recognise that the pace of reform has been slowed by virtue of the APC being a coalition and by institutional and other vested interests. Expectations are high and many of the plans will only have an impact over time, which together reinforce the need of the FGN to communicate better its policies and its successes,” it stated.

According to the report, “There are some achievements to trumpet. We note therefore the recapture of almost all territory held by Boko Haram, changes at the top of the NNPC, the corporation’s greater transparency, its planned experiment with self-financing JVs in the oil industry, the fuel price reform in May and the exchange-rate reform in June. The latest distribution by the Federation Account Allocation Committee (FAAC) points to a marked improvement in non-oil revenue collection.”

It specifically stated that, “The administration will be judged on its fiscal policy because it has pushed an expansionary agenda with ambitious capital spending plans (when governments in Ghana, Angola and elsewhere in similar circumstances have opted for austerity). The 2016 budget assumes an average oil price of US$38/b, which now appears sound. We cannot say the same for the output assumption, given the pick-up in sabotage.

“To make good the fall in revenues from the oil industry, and to attain its capital spending plans without a soaring deficit, the FGN has to come close to hitting its aggressive target for its tax take from the non-oil economy.”