By Clara Nwachukwu with Agency Report
Nigeria oil is currently suffering from an overhang of unsold cargoes for January keeping pressure on barrels. Crude oil traders said last week that between 15 and 20 Nigerian cargoes scheduled for January were yet to be sold.

Variants mostly affected were a range of sweet, medium and light grades, remained available for loading next month, just a few days before the release of the new February loading programme.

If the glut continued, revenue projections for 2012 may be seriously impacted, and indeed, the entire National Budget, since oil accounts for more than 80 percent of Nigeria’s total earnings and more than 90 percent of its foreign exchange income.

In contrast, Angolan barrels for January were mostly placed, traders said, with prices for most of the heavier crude grades steady. “There is nothing from Angola in January that absolutely needs to trade,” said a West African crude oil trader with a U.S. company.

Nothing to worry about

But the Department of Petroleum Resources, DPR, the industry regulator said there is nothing to worry about, as the development is a regular market occurrence, adding that the information on unsold cargoes may not be correct.

The Director of DPR, Mr. Osten Olorunsola, in a telephone conversation with Vanguard, argued that there is no fear of a glut yet, as prices have not rallied at alarming rtes. “One of the signals to a glut at any particular point in time is the price of crude oil at the international market. As long as prices have not changed significantly, there is no fear for a glut,” he noted.

He argued further that “The kind of swing that could cause a glut is when prices rally to about $5 or more, and anything in the range of $1 or $2 is a regular market swing. So we don’t have anything to worry about.”

Traders said almost all January Qua Iboe barrels but a couple of cargoes were reported to have been sold, but a couple of cargoes were being held back for commitment into India tenders. Qua Iboe was assessed between dated Brent plus $2.60 and plus $2.80.

Several traders were reported to have committed Bonny Light into Indian buying tenders and the cost of covering these positions could be around dated Brent plus $2.50, traders said. Other buyers were likely to be at a significant discount, possibly around dated Brent plus $2.00.

Asian buying interest continued with traders awaiting the award of a spot and mini-term tender from Indonesian state oil company Pertamina, but western refiner demand was reported to be fairly slow.

Oil trading

Generally, crude oil is sold through a variety of contract arrangements and in spot transactions. But it is also traded on futures markets but not generally to supply physical volumes of oil, more as a mechanism to distribute risk. These mechanisms play an important role in providing pricing information to markets.

Nigeria’s crude pricing is based on the Brent marker, as is the case for most crude from Europe, Africa and Asia.

The main criteria for a marker crude is for it to be sold in sufficient volumes to provide liquidity (many buyers and sellers) in the physical market as well as having similar physical qualities of alternative crudes.

In addition, the marker crude should provide pricing information. WTI does this through its use on the New York Metals Exchange (NYMEX) as the basis of a futures contract where trade is equivalent to many hundreds of millions of barrels per day, even though physical WTI production is less than 1 million barrels per day.

A futures contract for crude oil is a promise to deliver a given quantity of crude oil but this rarely occurs as participants are more interested in taking a position on the price of the crude oil.

Futures markets are a financial instrument to distribute risk among participants with the side effect of providing transparency on the pricing of crude oil.

Brent offers pricing information based more on the physical trading of oil through spot trading, and forward trading but also offers futures trading but not to the same extent as WTI.

Thus in times of tight supply this premium will rise and gradually drag up the Marker crude price, whilst in times of surplus supply, a reduced premium or even a discount will drag down the Marker crude price.

Of course big changes, announcement or events such as OPEC announcements, civil unrest or wars, hurricane activity, major refinery shutdowns or outages and a host of others can significantly influence crude supply levels will sometimes result a large step change in the prices of crude oil.