Blend of WTI, Brazilian grades undercuts Nigerian crude in fresh blow to sector

WTI Midland, the light sweet US grade, is being blended with heavy Brazilian grades to produce a cheaper Nigerian lookalike, which is undercutting the Nigerian crude grades in Europe and pushing down buying interest for Nigerian cargoes, multiple trading sources told S&P Global Commodity Insights.

In recent months traders have struggled to offload cargoes of Nigerian crude as buyers in India and China moved to buy more heavily discounted Urals crude, now even European refiners have begun looking elsewhere for crude oil.

In turn this has pushed Bonny Light, Nigeria's flagship crude grade to 50 cents/b discount to Dated Brent on June 6. The discount has narrowed slightly over the last few days but has averaged a discount to Dated Brent over April, May and so far in June.

"WAF is losing out to alternatives in Europe - [WTI] Midland and Brazilian [grades] have been consistently undercutting [differentials, and sellers of Nigerian barrels] just cannot find demand in Europe," one trader said.

Blending of the grades at European refineries produces crude with the low sulfur quality of Nigerian grades, but with enough heavy Brazilian content to ensure not too much naphtha is produced, sources said.

This is latest blow to Nigeria's embattled oil sector, with production falling in recent years due to security, underinvestment and technical issues at ageing wells. African crudes popular with refiners in Asia have been undercut in recent months by cheap Russian barrels, due to the price cap imposed on Russian oil by Western countries following the war in Ukraine. Indian and Chinese refiners, in particular, have become hooked on Russia's Urals grade, according to data from S&P Global Commodities at Sea.

"I don't think Nigeria can sustain competition with WTI Midland mixed with Brazil, [it's been a] long time now since we have seen Europe able to absorb Nigerian exports," a second trader said.

Lower demand

Sources hinted that blending of WTI and Brazilian grades to make a more affordable Nigerian substitute grade had been occurring for some weeks, leading to a material decline in demand for the country's crude. "Nigerian [grades] like Bonga, Forcados and Escravos are struggling - lots of availability indeed," a third trader said.

Sellers have already observed a noticeable reduction in the amount of WAF crude being purchased by some European refiners. "We've seen some usual WAF buyers have underbought by 100,000 barrels/day now," said a fourth trader, adding that "when you don't have India buying as well [that is] putting pressure on the market."

The lack of Indian demand over the last six months in combination with the competition from the blended WTI Midland and Brazilian barrels is driving the continued bearish sentiment, sources said. "The fall will be inevitable," another trader said, referring to Nigerian crude differentials.

"Nigerian producers have to lower prices to compete," said Uwadiae Osadiaye, an analyst at Lagos-based FBNQuest.

"Europe is a major market for the country," he added, "and unlike Russia we don't have many options."