As the Russia – Ukraine conflict intensifies, and Western countries increase sanctions against the aggressor a new challenge emerges for West African oilers. Russia needs to ensure a steady pipeline of cash to prop up their economy and so Russian oil is being supplied at less expensive levels for those nations willing to absorb the wrath of the west. Some of these nations also happen to be the best buyers of West African crude.
India, Nigeria’s main oil exporting partner, imported 15% of Nigeria’s crude oil as of 2021. However, huge discounts on sanctioned Russian crude have their head turned in another direction. India which was importing just 2-5% of its crude from Russia in 2021, imported half as much crude from Russia in one month (March) as it did in an entire year risking backlash from major world powers. Supplies from largest oil exporter are seen piling up, with an overhang of April and May-loading crude reaching at least 40 cargoes.
India is not the only one looking for cheaper oil prices, it is likely that China will also follow suit but fears of secondary sanctions from western countries has kept this out of the public eye. China’s zero Covid policy has had the country on a strict lockdown as the Covid outbreak resurged at high levels. China, Angola’s largest crude oil buyer, has softened with its demand for Angolan crude oil. Lockdown isn’t the only reason for China’s dwindling demand for Angolan oil. The Chinese independent refiners known as the ‘teapots’ are the key drivers of demand for Angolan oil. The Chinese teapots have recently reduced demand due to narrowing margins and Chinese government curbs. Angola has yet to sell out along with at least 10 cargoes for May according to some Asian traders, the slowest sales in years and a sign of diminishing demand. As a response to declining demand, Angola reduced its offer price by $1/bbl.
The European union is still split over Russian oil because the continent gets more than 40% of its energy from Russia. Most member countries have announced to cut out Russian oil by the end of the year while others are planning to reduce Russian oil without eliminating it entirely. To replace Russian energy members of EU are still weighing their options looking for cheaper alternatives to Russian oil despite OPEC announcing that it’s not possible to replace entirely the Russian oil supply deficit.
The question is, do the top oil exporting African countries have the capacity to supply Europe with oil in the short term? For such countries to the fill gap would mean they would have to have spare capacity of at least 7.4 million barrels per day. Currently, Angola and Nigeria are far behind in meeting OPEC quota for oil production, to think of even sparing capacity would be impossible given current trends.
Another challenge, would be lack of pipeline infrastructure to transport energy quickly to Europe especially from sub-Saharan countries. Currently, there are four pipelines in North Africa that transport oil directly from Algeria to Europe. It will be huge milestone building new infrastructure in sub-Saharan Africa to connect with the existing network in North Africa. This implies that even if African producers find a way of increasing their capacity their lack of infrastructure make it impossible to supply Europe with oil even into the medium term. Oil cargoes is likely going to be even more expensive for Europeans who are currently fighting higher energy prices in its economy.
Demand for African oil is gradually declining as the world’s largest world’s largest crude oil importers look elsewhere for cheaper alternatives. This poses concern African to countries such as Nigeria and Angola who have a positive correlation between oil prices and their sovereign bond prices. Higher oil prices boost fiscal revenue helping to reduce budget deficits. Declining demand for oil would mean lower oil prices and soaring fiscal deficits. Sovereign bonds yields are expected to rise on the back of a decreasing demand for African oil.
Pressure still mounts on EU leaders daily to expedite sanctions on Russian oil as the economic and humanitarian crisis happening in Ukraine becomes more brutal so refiners will be in search for other crude markets. We expect there to be demand challenges of Sub-Saharan African oil for the foreseeable future.
