Crude oil extended its gains at the weekend after closing at a six-week high with signs of strengthening demand in key markets, thereby piling more pressure on the ability of the Nigerian National Petroleum Corporation (NNPC) to contribute to the Federation Account.
However, the organised labour has suggested the adoption of production cost pricing method where the price of petrol will be based on the cost of domestic crude oil production and refining in the domestic market, as a way of reducing the burden of the price disparity between the market and pump prices of petrol on the federation.
NNPC has been shouldering the subsidy on the pump price of petrol which has on some occasions gulped as much as N120 billion monthly.
Last week, the corporation, in correspondence to the Accountant General of the Federation (AGF), Mr. Ahmed Idris, served a notice that it would be unable to contribute to the Federation Account in May after deducting about N112 billion subsidy funds from its April revenues.
In the official communication, the NNPC said the shortfall was due to the rising average landing cost of fuel, which jumped to N184 per litre in March as opposed to the existing N128 ex-coastal price.
However, after weeks of bearish run, crude prices have again started to pick up, portending a higher landing cost and by extension further rise in petrol subsidy payments by the NNPC.
Brent for June settlement gained 0.6 per cent to close at $66.7 after rising 1.3 per cent, while West Texas Intermediate (WTO) for June delivery also rose to $63.58 a barrel after climbing 1.5 per cent at the weekend.
Demand for the US petroleum products increased to the highest in more than two months, while distillate inventories, a category that includes diesel, dropped the most since early March.
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There was a chorus of bullish voices on the outlook for crude during the week, including a prediction from Goldman Sachs Group Inc. that oil demand will post a record jump over the next six months as vaccination rates accelerate.
Added to that, the Organisation of Petroleum Exporting Countries (OPEC) also raised its estimates for growth this year, although the alliance warned that a worsening virus situation in India, Japan and Brazil could derail the recovery.
India, one of Nigeria’s crude oil buyers, has recently been hit hard by a second wave that has pummelled fuel consumption and stretched the health-care system beyond its limits.
In March last year, when the international crude oil price was at its lowest, the federal government announced that it had deregulated the downstream sector, noting that it would thenceforth be subjected to market forces.
But that policy collapsed a few months later when prices started to pick up, as the pump price rose from a low of N121 to N162 within months, resulting in public outrage and threats by the organised labour to embark on a strike.
