Nigerian Gasoline Price Review to N125 and the Pursuit of Fuel Subsidy Removal

Tuesday, March 24, 2020 / 8.00PM /FBNQuest Research / Header Image Credit: LTV

The announcement of a N20reduction in the price of Petroleum Motor Spirit, PMS has received mixedreactions across the country. For the petroleum industry which will feelthe wider impact, it has come as a big break for the downstream marketers inthe country.

Taking a deeper look atthe recent announcement by the Ministry of Petroleum Resources, the policygains is subject to the government retaining a free market, by settinggasoline pump prices in line with prevailing global oil prices. Despite thispolicy move, an immediate boost to product sales volumes in H1, 2020 is notlikely due to the impact of the global coronavirus pandemic, which will affectsocial, religious and economic activities in major cities such as Lagos.

In context there areindications that there will be increased petroleum importation activities bymarketers, following the recent official figures that shows Lagos accountingfor 20% and 55% of national gasoline consumption respectively in thecountry. This is why the Federal Government will have to make a bolddecision when the global economy restarts and oil markets strengthen. There are two options which are; either to continue with the price modulationor revert to the subsidy regime.

It is understandable thatthe government's new found flexibility is driven by rapidly declining globaloil prices resulting from the health pandemic and an ongoing dispute betweentwo of the world's largest oil producers Russia and Saudi Arabia.

Going strictlyby the FG's statement, it could be inferred that we have seen the last ofgasoline subsidies. Nevertheless, we recall that a similar price modulationmechanism was introduced in 2016/17 when oil prices were also subdued.Subsidies were subsequently re-instated as prices increased.

Keytakeaways 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. Yesterday's announcement was a follow on from a -14% (or N20/litre) reduction in gasoline pump prices to N125/l the day prior.

Whilethere is hope that global efforts to control the spread of COVID-19 yieldfavorable results in the short term, the timingon a resolution (if ever) of the Russia-Saudi Arabia row is harder to call.There are indications that OPEC+ might be irreparably broken which couldpotentially result in relatively lower oil prices beyond this year. The nextOPEC meeting is scheduled to hold on the 9^thof June, 2020. Therefore, it is very likely that oil prices will remain subdued at around US$30/barrel levels in H1 2020.

Underthis scenario, the FG's resolve to maintain the newly introduced market-drivenpricing regime will likely not be tested as the expected market price forgasoline should comfortably remain below the previous N145/1 pricing ceiling, all things being equal. It is alsoimportant to note that the present situation could change quickly and as suchto not totally write off the possibility of an emergency OPEC+ meeting beforeJune, 2020.

For nowthough, it is considerate to write off any chances of a strong recovery inglobal oil prices over the next quarter. Although China is getting back on itsfeet, OECD economies - which account for almost half of global oil demand arepresently in the eye of the COVID-19 storm. Therefore, we expect global oildemand to remain weak for some time yet.