‘FX Crunch Undermines Downstream Oil Sector Deregulation‘
Foreign Exchange (FX) scarcity could stifles downstream oil sector deregulation following more than 47% reduction in foreign inflow into investors and exporters window, according to available data from FMDQ.
Amidst its FX rationing, analysts at CSL Stockbrokers Limited however advised the Central Bank of Nigeria (CBN) to reconsider its methodology to accommodate demand by the oil market companies.
Competition in the downstream sector has remained weak as the state-run oil company continues to maintaining stronghold in the sector as key importer.
Meanwhile, analysts at CSL Stockbrokers in a note said they believe that FX shortages could stifle downstream oil sector deregulation if oil marketers find it difficult to access forex from the apex bank.
In September 2020, the Minister of State for Petroleum Resources, Timipre Sylva announced that the government will now take a backseat in the regulation of the price of petrol, noting that market forces and crude oil price would continue to determine the cost of the product.
CSL explained that the announcement implied the beginning of a long craved market reform, total deregulation of the downstream oil sector.
Indeed, true to the words of the minister, the price of PMS has been revised almost on a monthly basis in line with fluctuations in international crude prices as well as other market determining factors.
In the past five months, analysts said the price of petrol has been revised four times, rising from N121.50–N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N165-N170 in November.
However, despite the perceived full deregulation of the downstream oil sector, the sector has been plagued by its deep-seated monopolistic structure.
CSL stated that the Nigerian National Petroleum Corporation (NNPC) remains the primary importer and distributor of petrol to petrol stations in the country.
“We recall that in 2018, NNPC became the main importer of petrol as it became unprofitable for private Oil Marketing Companies (OMCs) to import the product due to higher crude prices coupled with steep devaluation of the exchange rate.
“This remains the case despite the total deregulation implemented by the Federal government as well as the granting of Quality Management (QMs) to OMCs which gives them permission to import petroleum products.
“The reason for this has been the lack of access to FX for many of the OMCs”, CSL Stockbrokers stated.
That said, the firm noted that the FX shortage is a national economic issue following the slump in crude prices which has pressured FX earnings all through the year.
As a result, it explained that CBN has been forced to ration whatever FX it has available in a bid to safeguard the nation’s FX reserves.
According to data from FMDQ at the close of trading yesterday, total FX inflow into the I&E window from January till date (Nov 17 2020) stood at US$15.8bn compared with US$30.0bn within the same period in 2019 (Jan 1, 2019 – Nov 17, 2019).
“This evidences the depth of FX crunch faced by importers”, CSL Stockbrokers stated.
Nevertheless, analysts said they think it’s imperative for the CBN to begin to reconsider its rationing methodology to accommodate the FX demands of OMCs who have to import petrol.
CSL stated that failure to provide necessary FX would ultimately derail the deregulation policy.
This, according to the firm, would hinder achievement of the key objectives of deregulating the sector.
Analysts explained that the downstream oil sector is deregulated to eliminate market distortion, fostering healthy competition in the sector as well as encouraging investments in privately controlled refineries which would further support product availability and overall economic growth.
Read Also: Investors/Exporters Window: Experts Views on the CBN FX Regime
‘FX Crunch Undermines Downstream Oil Sector Deregulation’
