“Upward Price Review of PMS Signposts Sustain Deregulation”

Analysts at Chapel Hill Denham (CHD) has said the recent upward review in prices of petroleum motor spirit (PMS) otherwise call petrol signposts sustained deregulation.

It would be recalled that recently, the Petroleum Products Pricing Regulatory Agency (PPPRA) notified all petroleum product marketers in Nigeria of a new PMS retail price band of ₦140.80 – ₦143.80 per litre.

The new price band will be effective for the month of July, jumping from ₦125/litre in June 2020."Upward Price Review of PMS Signposts Sustain Deregulation"

The circular also noted that the new band was determined after a review of prevailing market conditions in June 2020 and inclusive of marketer’s realistic operating costs, as much as practicable.

With the new increase, the PPPRA has adjusted PMS prices close to its initial fixed price of ₦145.00/litre prior to deregulation.

In a note, analysts at CHD believe the upward adjustments in the PMS Pump price was necessitated by the increase in global crude oil prices.

This is coming after the downward adjustment in the pump price on 18 March 2020.

Brent Crude has since risen by 39.9% to US$42.03/barrel as at 1 July 2020 from last benchmark price of US$30.05/barrel.

CHD said it had noted that an upward re-rating in crude oil prices will test the FG’s resolve to fully deregulate PMS prices.

Hence, analysts at CHD view the upward adjustment as indicative of the FG’s stance on deregulating PMS prices.

“This, in our view, will eliminate a re-introduction of oil subsidies, previously associated with the downstream oil sector for decades”, the firm stated.

Notably, the improvement in crude oil prices is driven by the reopening of some economies post COVID-19 lockdowns.

This is also supported by oil output cuts of up to 20% of global supply by a joint coalition of the Organisation of Petroleum Exporting Countries (OPEC) and some members of the G-20, led by Saudi Arabia and Russia.

Based on the agreement, these countries opted to cut oil output between May 2020 & July 2020.

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CHD said using an assumed exchange rate of ₦360.00/US$, it estimates the new landing cost (LC) and Expected Open Market Price (EOMP) at ₦100.59 and ₦119.96 respectively.

“These represent 56.4% and 43.3% increases over the previous LC & EOMP of ₦64.32 and ₦83.29 respectively”, the firm stated.

CHD explained that based on its new estimates, Oil Marketing Companies (OMCs), will still enjoy a premium of ₦23.84/litre of PMS sold.

This is based on an assumption that associated costs such as freight, lightering expenses, NPA charge, NIMASA charge, and storage amongst others, remain unchanged, it added.

“However, we note that the Executive Secretary of the PPPRA, Mr. Saidu Abdulkadir, recently stated that the agency was finalising the re-adjustment of cost elements and profit margins on the pricing template.

“If adjusted, the cost elements will reflect the current market-driven pricing regime and ensure that consumers are not overcharged.

“We also note that the Nigerian National Petroleum Corporation (NNPC) is still largely responsible for PMS imports, despite the removal of oil subsidy.

“We believe the status quo will remain unchanged, until FX availability improves and the PPPRA allows OMCs to unilaterally determine PMS prices”, CHD explained.

On an assumption that OMCs are able to source FX at Investors and Exporters window (IEW) using ₦386.50/US$, analysts estimate LC and EOMP at ₦112.55 and ₦131.92 respectively.

By that, it implies a further 11.9% and 10.0% increase in the LC & EOMP as against exchange rate of ₦360.

“Based on this exchange rate, OMCs will still realise a premium of ₦11.47/litre of PMS sold”, Chapel Hill Denham stated.


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