The coming diesel crisis: Store, hedge or switch.

4. The coming diesel crisis: Store, hedge or switch.

Two factors have contributed to the escalating prices of middle distillates such as diesel and petrol compared to crude oil: the naïve and derisory treatment of the oil and gas industry culminating in the closing of about 2 million barrels per day refining capacity across the world and the Russian invasion of Ukraine.

In Nigeria, diesel has risen from as low as N300/Litre early this year to as high as N900/litre. Unfortunately, these high prices are set to persist or worsen as diesel inventories in key hubs have fallen to levels not seen in 40 years. More specifically, the Ney York Harbour prices have skyrocketed in recent weeks, triggering diversions from markets such as Nigeria to the US. In dollar terms, diesel is as high as $200/bbl and winter has not even started when peak demand for diesel peaks.

That portends serious dangers for businesses that rely on diesel in Nigeria. First, prices are high on the international market but more damaging is the fact that since diesel is deregulated in Nigeria, there are no subsidised exchange rates for diesel imports, so traders/importers have to source for dollars at the black market which is at N800/$ now. This combination of headwinds puts business is mortal danger. It would not be a surprise if diesel is sold at N1000/litre in the next few weeks.

Options for heavy diesel users is to store a lot, buy financial hedges on the market or just switch to natural gas products like CNG, LNG or LPG. The Return on Investment (ROI) on switching has improved significantly especially since natural gas prices in Nigeria are indexed to the heavily regulated CBN exchange rate

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