Fuel Price Expectations and Stability in a Market determined Price System

By Chinedu Okoye 




Summary:

- The NNPCL will begin lifting petroleum motor spirits from Dangote on September 15, marking the end of fixed pricing.

- Petrol prices will be determined by forex rates and market forces, as NNPCL will sell crude to refineries in Naira at prevailing market exchange rates.

- Global market prices will influence local pricing. Whilst lower oil prices will increase costs for NNPCL it reduces costs for local refiners.

- Sustained oil production is crucial for stabilizing FX and fuel prices. Exchange rates and crude oil supply will significantly impact fuel prices.



The End of Fixed Prices:

The NNPCL expects the roll out of petroleum motor spirits on the 15th of September. The company also announced the exit of a fixed pricing system for the petroleum, stating that forex rates and market forces would determine the cost of petrol. 

This means the NNPCL would sell crude to the Refinery in Naira at prevailing market exchange rates and pricing would mirror that of the global market. Thus, the N897/liter assumed price was somewhat invalidated, as lifting is yet to commence at the refinery.

On the supply side the NNPCL mentioned that the total supply of Crude to Dangote stands at 30 million barrels with another 17 million in the way.



Future Price Dynamics:

The going rate for the BRENT Benchmark oil prices has seen a sharp drop in the past week to $73 on Thursday, which extended intraday (see the chart below) to 71.14/pb as at the timing of this article.

The bearish momentum the oil market seems to be gathering will most likely spill into the Nigeria intra-country oil market.

(BRENT Crude Chart [investing.com] intraday 06 September)

A lower oil price means higher costs relative to revenue for NNPCL and lower raw materials (crude) costs for the local refiner.

Except there is a significant increase in oil production, a subdued oil price below the budgeted benchmark ($77) would lead to more costs for the already highly leveraged company and stall supply to the local refinery.

With Dangote Refineries operating at half capacity (325k bpd), 30 million barrels would be used up in 92 days. The extra 17 million, if immediately forthcoming would last 52 days.



Major Fuel Price Determinant:

Thus, in five months, if NNPCL isn't able to sustain supply to the refinery, the shortfall would have to be replaced with foreign crude, with the Refinery exposed to exchange rate volatility.

This leads to our assertion that neither a subdued Crude Oil price or a rebunyd to the $80s range would have a direct impact on local fuel prices in Nigeria.

Prices would depend on exchange rates and Crude oil supply is a major determinant of the Naira's real exchange rate. An sustained increase in Oil production is instrumental to stabilizing FX and fuel prices.

The NNPCL's emphasis on market determined prices and the invalidation of the N897/ltr fixed price per liter leads us to believe the end price could be about N900/N1000/liter.

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