Nigerian fuel subsidy removal to impact European refiners.

Nigerian fuel subsidy removal to impact European refiners.

The Shrinking Gasoline Market in Europe: Challenges and Opportunities for Refiners

London, July 28 (ANBLE) – The gasoline market in Europe is experiencing a significant decline as Nigeria removes fuel subsidies, leading to a decrease in domestic demand and a regional market for smuggled fuel. This development poses a challenge for European refiners who heavily rely on exports to maintain profit margins.

Historical Trends and Recent Reversals

Traditionally, North America and West Africa, with Nigeria as a key player, have been the top destinations for petrol exports from Europe. European refiners produce more gasoline than they consume, making exports crucial for sustaining profitability. However, in recent years, European refining margins have faced a downturn due to increased competition from the Middle East, the United States, and Asia.

The situation changed following Russia’s invasion of Ukraine, which triggered fears of fuel supply shortages and boosted profits. Benchmark profit margins for gasoline in northwestern Europe have been holding firm at around $27 a barrel. Factors such as demand from North America, a scarcity of high-quality blending materials, disruptions caused by low water levels, and local refinery outages have supported these margins.

Nevertheless, analysts predict that the reduction in gasoline flows resulting from the recent changes in Nigeria’s fuel subsidy policy will put further pressure on European refiners. In this scenario, newer Middle Eastern refineries are likely to emerge as winners.

The Impact of Nigeria’s Policy Change

In May, Nigeria’s President Bola Tinubu abolished the costly fuel subsidy, which had cost the Nigerian government $10 billion in 2020. As a result, petrol demand dropped by 28%, according to official data. This decline in demand is reflected in the increase of onshore gasoline stocks in Nigeria from an average of 613,000 tonnes between January and June to 960,000 tonnes.

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Moreover, the black market for smuggled subsidized Nigerian fuel in neighboring countries such as Togo, Benin, and Cameroon has collapsed, further reducing demand for shipments via Nigeria. Although there is no reliable data on the quantity of fuel smuggled under the subsidy regime, estimates indicate that over a third of petrol could have been sold illegally abroad daily.

Declining West African Gasoline Imports

The reduction in demand from West Africa is a key concern for European refiners. In the second quarter, monthly West African (WAF) gasoline imports experienced a significant decline of 56% compared to the first quarter. This decline has been driven by the drying up of demand in countries reliant on Nigerian gasoline imports.

Refinitiv Lead Oil Analyst Raj Rajendran emphasizes the importance of this trend, stating, “The key point is demand from West Africa is drying up.” Loadings of gasoline from the Amsterdam-Rotterdam-Antwerp (ARA) hub to West Africa also witnessed a decline, with June loadings falling to 629,000 tonnes this year from 895,000 tonnes in 2020 and 1.2 million tonnes in 2019. July loadings dropped even further to 627,000 tonnes, compared to 1.5 million tonnes and 1.4 million tonnes in 2020 and 2021, respectively.

Conversely, ARA exports to the United States have increased, reaching 695,000 tonnes in July, compared to 449,000 tonnes in the previous year. Although exports to the US have seen growth, they have not fully compensated for the decline in exports to West Africa.

Refiners’ Challenges and Opportunities

European refiners now face increased pressure due to the reduction of flows resulting from Nigeria’s policy changes. The surplus of gasoline in the ARA hub is at its highest level since 2003, as US exports have failed to make up for the decline in West African exports.

Moreover, Nigeria’s inadequate domestic refining capacity leads to heavy reliance on gasoline imports, which have become increasingly unaffordable since the weakening of the Nigerian naira and rising inflation. Although the Dangote refinery aims to address these supply challenges, full production is not expected until the second quarter of 2025.

Analysts propose that demand may not fully recover and could see a baseline decrease as the market adjusts post-subsidies. Alternative suppliers, such as those from the Middle East and Russia, are becoming more attractive to Nigerian buyers due to their lower prices. According to Sparta Commodities gasoline market analyst Philip Jones-Lux, fuel from the Middle East Gulf is currently $35-$50 per tonne cheaper than imports from ARA. This significant price difference could result in increased imports from the Middle East into West Africa.

While Russian gasoline flows to West Africa have increased since January, cumulative volumes remain small compared to European refiners. However, it is not Russia that poses the biggest challenge to European refiners but rather the rapidly expanding Middle Eastern refineries that are now venturing into West Africa and even the Americas.

In conclusion, the removal of fuel subsidies in Nigeria has led to a contraction in Europe’s gasoline market, presenting challenges for European refiners. The decline in gasoline flows to West Africa and the collapse of the black market for smuggled fuel have further intensified this challenge. However, opportunities arise for newer Middle Eastern refineries to fill the gap through increased exports to West Africa. European refiners must adapt to these changing dynamics and consider alternative strategies for maintaining profitability in the evolving gasoline market.

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