Tuesday, March 24, 2020 / 8.00PM /
FBNQuest Research / Header Image Credit: LTV
The announcement of a N20
reduction in the price of Petroleum Motor Spirit, PMS has received mixed
reactions across the country. For the petroleum industry which will feel
the wider impact, it has come as a big break for the downstream marketers in
the country.
Taking a deeper look at
the recent announcement by the Ministry of Petroleum Resources, the policy
gains is subject to the government retaining a free market, by setting
gasoline pump prices in line with prevailing global oil prices. Despite this
policy move, an immediate boost to product sales volumes in H1, 2020 is not
likely due to the impact of the global coronavirus pandemic, which will affect
social, religious and economic activities in major cities such as Lagos.
In context there are
indications that there will be increased petroleum importation activities by
marketers, following the recent official figures that shows Lagos accounting
for 20% and 55% of national gasoline consumption respectively in the
country. This is why the Federal Government will have to make a bold
decision when the global economy restarts and oil markets strengthen.
There are two options which are; either to continue with the price modulation
or revert to the subsidy regime.
It is understandable that
the government's new found flexibility is driven by rapidly declining global
oil prices resulting from the health pandemic and an ongoing dispute between
two of the world's largest oil producers Russia and Saudi Arabia.
Going strictly
by the FG's statement, it could be inferred that we have seen the last of
gasoline subsidies. Nevertheless, we recall that a similar price modulation
mechanism was introduced in 2016/17 when oil prices were also subdued.
Subsidies were subsequently re-instated as prices increased.
Key
takeaways from the structural adjustments to the gasoline price are:
While
there is hope that global efforts to control the spread of COVID-19 yield
favorable results in the short term, the timing
on a resolution (if ever) of the Russia-Saudi Arabia row is harder to call.
There are indications that OPEC+ might be irreparably broken which could
potentially result in relatively lower oil prices beyond this year. The next
OPEC meeting is scheduled to hold on the 9th
of June, 2020. Therefore, it is very likely that oil prices will remain subdued at around US$30/barrel levels in H1 2020.
Under
this scenario, the FG's resolve to maintain the newly introduced market-driven
pricing regime will likely not be tested as the expected market price for
gasoline should comfortably remain below the previous N145/1 pricing ceiling, all things being equal. It is also
important to note that the present situation could change quickly and as such
to not totally write off the possibility of an emergency OPEC+ meeting before
June, 2020.
For now though, it is considerate to write off any chances of a strong recovery in global oil prices over the next quarter. Although China is getting back on its feet, OECD economies - which account for almost half of global oil demand are presently in the eye of the COVID-19 storm. Therefore, we expect global oil demand to remain weak for some time yet.
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