Thursday, June 04, 2020 / 10:28 AM / By CSL
Research / Header Image Credit: The Guardian Nigeria
The decision of the Petroleum Products Pricing Regulatory
Agency (PPPRA) to reduce the pump price of Premium Motor Spirit (PMS), also
known as petrol, to N121.50 per litre from N123.50 per litre has been met with
stiff resistance from oil marketing companies (OMCs). The Independent Petroleum
Marketers Association of Nigeria (IPMAN) have also stated that it impossible
for its members to sell petrol at the new price floor of N121.5 per litre.
We recall that on 18 March 2020, the Federal Government
(FG) reduced the retail price of Premium Motor Spirit (PMS) by c.14% to
N125/litre from N145/litre, following the global pandemic which led to an
unprecendented decline in oil prices and by extension a reduction in the
landing cost of petrol. Subsequently, the FG announced a further reduction to
N123.50 which took effect on April 1, 2020. Earlier this month, the FG directed
a reduction in the pump price of Premium Motor Spirit (PMS) for the third time
to N121.50 per litre. We note that the adjustments in the retail price is in
line with the directive from PPPRA on a monthly review of the pump price,
depending on prevailing market realities.
In our view, considering the landing cost of petrol is
largely influenced by the prices of crude oil in the international market, we
think prospects of continued recovery in crude oil prices is likely to put
upward pressure on the cost of importing petrol. With the gradual relaxation of
lockdown measures by countries who are starting to reopen their economies
alongside the historic production cuts of OPEC+ which took effect last month (a
9.7mb/d oil production cut for May and June), we think the risks to oil prices
are tilted to the upside in the near term.
Since hitting a two-decade low of US$19.33 on 21 April
when the retail price of petrol was pegged at N123.50, brent crude prices have
gained c.105% to close at US$39.54 on 3 June. Against this backdrop, we expect
that the retail price of petrol should rather be adjusted upwards to reflect
current market realities. The current situation appears no different from
historical trends where the FG becomes reluctant to effect an upward adjustment
in the retail price of petrol during periods of rising crude prices. This has
often resulted in the renewed payments of the age long fuel subsidy. We also
think oil marketing companies (OMCs) who have only recently begun to import
petrol alongside the Nigerian National Petroleum Corporation (NNPC) due to more
favourable pricing could halt importation once again if domestic retail prices
become unfavourable.
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