For decades, Nigeria has been the bellwether of change in global oil markets. Today, the country is struggling to find buyers for its oil. French refining sector strikes and seasonal maintenance elsewhere have cut demand for Nigerian barrels — a problem compounded by the country’s success in boosting output.
The term “credit” has yet to be mentioned in coverage of Nigeria’s difficulties. However, the trading companies buying the oil are likely paying close attention to credit terms and the shape of the forward price curve. Brent crude is still in backwardation, although it is declining, and trading firms are unlikely to step forward and buy Nigerian oil until Brent shifts into contango. But to create sufficient contango to re-establish a satisfactory market for Nigerian crude, Brent would probably need to fall to $55 per barrel from around $78 now. Such a drop would also probably spur Opec-plus to cut output.
Worried Yet?
Many in the industry still seem to be relaxed about the danger of financial contagion. At the recent FT Global Commodities Summit in Lausanne, Switzerland — held just after the country’s authorities forced Credit Suisse to merge with UBS — speakers downplayed the risk, suggesting the crisis would likely be contained and not prove a repeat of the great financial meltdown of 2007-08. Nor do they think it will have a material impact on demand. Some executives from major trading firms did, however, admit that smaller traders could face credit constraints — particularly in the hubs of Geneva, Zug and Lausanne, where Credit Suisse, UBS and the country’s cantonal banks provide a significant chunk of traders’ lines of credit.
The truth is that commodity traders and the oil industry should be very worried. The banks’ unwillingness to lend will force firms to reduce oil stocks. Nigerian excess output will also depress crude prices. Gasoline and diesel demand growth will be slowed as construction activity decreases. Oil, then, could become the collateral damage of financial contagion.
Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is editorial director of PKVerleger LLC. The views expressed in this article are those of the author.