Nigeria’s fuel subsidy removal squeezes European refiners as petrol demand shrinks

Europe’s petrol market, one of the continent’s primary outlets for fuel exports, is experiencing a substantial contraction following recent developments in Nigeria.

The removal of fuel subsidies in Nigeria has triggered a notable decline in domestic demand, affecting the regional market for smuggled fuel.

Traditionally, North America and West Africa (WAF), with Nigeria as a key player, have been the primary destinations for petrol exports from Europe.

As Europe consistently produces more petrol than it consumes, its refiners heavily rely on exports to maintain profit margins.

European refining margins had been steadily declining over the past years due to heightened competition from the Middle East, the United States, and Asia. However, this trend reversed when concerns about fuel supply shortages arose after Russia’s invasion of Ukraine.

According to Reuters data, benchmark profit margins for petrol in northwestern Europe have remained stable at approximately $27 a barrel. This stability can be attributed to demand from North America, disruptions caused by low inland water levels, and local refinery outages.

Despite this temporary stability, analysts predict that European refiners will face increased pressure following the upheaval in Nigeria, potentially benefiting newer Middle Eastern refineries.

The reduction in petrol flows resulting from Nigeria’s policy change has led to increased onshore petrol stocks in Nigeria, rising from an average of 613,000 tonnes between January and June to 960,000 tonnes, as reported by Jeremy Parker at the CITAC consultancy, which focuses on Africa’s downstream energy market.

Moreover, the black market for smuggled subsidized Nigerian fuel in Togo, Benin, and Cameroon has collapsed, further reducing demand for shipments via Nigeria.

With Nigeria scrapping the fuel subsidy, the financial incentive for fuel smuggling has disappeared, leading to a significant drop in average monthly West African (WAF) gasoline imports in the second quarter, down by 56% compared to the first quarter, according to Refinitiv Eikon data reported by Reuters.

European exports to West Africa, particularly from the Amsterdam-Rotterdam-Antwerp (ARA) hub, have declined significantly, while exports to the United States have shown some growth.

Reuters reports that Nigeria, being Africa’s largest crude oil producer, heavily relies on imports due to inadequate domestic refining capacity. However, the weakening of the Nigerian naira and high inflation rates have made imports increasingly unaffordable.

The much-delayed Dangote refinery, designed to address the domestic supply shortfall, is not expected to reach full production capacity before the second quarter of 2025, as estimated by CITAC.

Reuters also added that analysts anticipate that demand for barrels into WAF may remain lower as the market adjusts to post-subsidy conditions, potentially leading to a baseline decrease in demand.

To meet the demand for cheaper alternatives, Nigerian buyers are turning to imports from the Middle East Gulf and Russia, with Middle Eastern fuel being around $35-$50 per tonne cheaper than ARA imports, according to insights from Sparta Commodities.

While Russia’s petrol flows into West Africa have increased since January, the cumulative volumes are still relatively small compared to other sources, as per Refinitiv Eikon data.

“The challenge is coming from the new refineries in the Middle East that are expanding from their traditional East Africa market to now include West Africa and beyond even to the Americas,” says Refinitiv Lead Oil Analyst Raj Rajendran, highlighting the main challenge to European refiners.