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:
Market forces will henceforth determine the price of all petroleum products;
Pricing bands will be determined by the Petroleum Products Pricing Regulatory Agency (PPPRA), and will be disclosed every two weeks and all marketers are now allowed to import petroleum products, ending the Nigerian National Petroleum Corporation (NNPC’s) monopoly. The announcement was a follow on from a -14% (or N20/litre) reduction in gasoline pump prices to N125/l the day prior.
While there is hope that global efforts to control the spread of COVID-19 yield favourable 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.