The combination of expected-persisting monetary accommodation along with a hitherto sticky, macro-proof global demand profile for diesel (influenced further by the looming likelihood in China of a weather-aggravated supply shortage in the coming months) make West African crude and, by proxy, its sovereign credit our holiday frontier market wish list security of choice.  The latter phenomenon–i.e. the burgeoning diesel/gasoline spread (see chart below)–continues to play on an ongoing theme, namely per one pundit the “diverging drivers behind the consumer and industrial activities as [developed market] high unemployment and stagnant wages continue to crimp consumer spending, while industrial and manufacturing activity [particularly in developing economies] are revving up.”  Barclays energy wonk Paul Horsnell further elaborated on diesel’s EM-fueled, relative buoyancy in a research note from last week:

“Ever since the migration of non-OECD countries to the margin of the oil market, diesel demand has received a significant boost on a global scale, given the bias of diesel in the oil mix in these countries. Its dominant position in commercial freight traffic has made it a fast growing demand component in countries characterised by large distances in internal trade and by strong underlying economic growth. For instance, in China, significant government investment in the road system and a mandate in 2000 that all trucks should run on diesel by 2010 facilitated the rapid expansion of domestic diesel demand. Beyond road transport, diesel also continues to be the primary fuel employed in China’s rail system, as well as being a major fuel for several significant types of marine transport. A similar picture can be painted for India, where diesel makes up 70% of road fuel use due to the intensity of truck and bus fuel consumption as well as the increasing penetration of diesel within the passenger car segment. In a country with some degree of oil product price subsidisation still in place, diesel prices are considerably more politically sensitive than gasoline. It has, therefore, usually proved easier to allow retail gasoline prices to rise with international markets, while retail diesel prices can often be stickier, with the current retail price discrepancy between gasoline and diesel almost double in India.”

Thus despite this weekend’s report indicating Asia would cut its African sourced imports to a three-month low, we expect lower or “sweet” sulfur blends (about half of the average Brent) from Angola and Nigeria (versus heavier or “sour” grades from Saudi Arabia and Iran) and their associated higher (up to twice more) distillate yield to continue to be in vogue.  The Chinese in particular continue to suffer from tight supply side dynamics–“especially in the country’s Northern, Eastern and Central regions” per Horsnell–such that net product imports (at 322k b/d in October, higher than the year-to-date average of 286 thousand b/d) will likely continue to trend up.  And while Nigeria, Africa’s largest oil producer, plans to export 2.18m b/d of crude next month, with Angola second at 1.72m, we remain impressed with the relative price stability in Ghana in the face of oil output that, while growing, still fell short of expectations.  Granted, Ghana’s fiscal targets (both its own and those set by the IMF) were predicated on abnormal output, and thus the initial 5.5% of GDP deficit estimate may turn out to be a bit pollyanna given President John Atta Mills’ looming showdown with Nana Akufo-Addo (close runner-up in 2008) next year.  Yet inflation expectations remain sanguine enough (CPI +8.6% y/y in October from 8.4% in September, in line with consensus, while non-food inflation was unchanged at 11.3% y/y, suggesting still modest inflationary pressure per analysts) that the country’s 12.5% policy rate will most likely remain unchanged into 2012.  To echo our sentiment from last spring, therefore, Ghana’s 2017 Eurobonds remain attractive versus peers.

Advertisements