EXPLAINER! Real cause of Nigeria’s oil price slash, impact on markets

Due to an import glut and increased competition between fuel importers and recently established local refineries, the price of Premium Motor Spirit (PMS), also referred to as petrol, has significantly decreased in Nigeria.

Nigeria has seen a spike in petrol imports in recent months as dealers and marketers have increased shipments ahead of expected refinery outputs. The domestic market is now oversupplied as a result of this surge, which is driving down gas prices.

According to market observers, importers are providing discounted prices in an effort to swiftly sell merchandise in order to clear out existing stock. One petroleum marketer observed, “There is too much supply chasing limited demand. Everyone is attempting to sell before prices continue to decline.”

The development of local refining capacity, particularly the slow operations ramp-up at the Dangote Refinery, Africa’s largest, is adding to the pressure on pricing. The refinery is still in the early phases of operations, but its arrival is already changing the dynamics of the local petrol market.

Additionally, smaller modular refineries are beginning to make a tiny contribution to domestic production, lessening Nigeria’s long-standing reliance on petroleum imports. Even though it is currently limited, this local output is making competition among downstream sector players even more fierce.

READ ALSO: South-West governors launch ambitious economic agenda to drive regional growth

IMPACT ON MARKETS:

This development portends positive FX implications, as reduced fuel imports (due to local refining) mean lower pressure on foreign exchange reserves and demand for dollars.

If sustained, this trend helps Nigeria defend the naira without excessive reserve depletion, which will impact its Eurobond, as improved external balance strengthens Nigeria’s sovereign credit profile, which can lower perceived default risk and lead to narrower spreads on Nigerian Eurobonds.

The current price decline, which is determined by market forces rather than subsidies, indicates that the government is sticking to its deregulation policy.

On the other hand, the recent drop in Nigerian fuel prices—caused by an excess of imports and the growth of domestic refining—has a number of short- and medium-term market effects that affect many industries.

Smaller or less effective marketers may be forced out, particularly if local refineries obtain a price advantage, and the downstream petroleum sector will suffer from a compression of margins for importers who must sell gasoline at lower prices to clear excess stock, resulting in lower profit margins.

Local refineries will now face pressure from competition as a result of this development. Although refineries like Dangote’s are anticipated to reap long-term benefits, they are under pressure to offer competitive prices in the short term to compete with low-cost imported petroleum. This is especially true given that, should economies of scale be realized, efficient local refining may eventually take over the supply chain.

The post EXPLAINER! Real cause of Nigeria’s oil price slash, impact on markets appeared first on Latest Nigeria News | Top Stories from Ripples Nigeria.