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Europe awash with quality oil as U.S. imports fall

23 May 2012, 09:10

LONDON, May 23 (Reuters) - Europe is facing a glut of high quality crude oil grades, only a year after war in Libya created a serious shortage, as the continent's demand falls and the United States cuts imports due to greater availability of domestic supply.

This has led to a steep weakening in values for many high quality sweet and low-sulphur grades in a rare market development potentially suggesting oil futures prices have scope to correct yet lower in a very oversupplied market.

"Oil prices have come down, refining margins have improved but it is still a terribly bleak picture for me. I'm struggling to sell in Europe, the U.S. has cut barrels and it is only Asia which regularly saves (us) from a steeper fall," a major trader in sweet grades in Europe said.

Physical crude grades are priced via differentials versus benchmark dated Brent and these diffs - as they are known in the industry jargon - have sunk over the past weeks to the lowest level in years on the Mediterranean sweet grade market.

Algeria's light sweet Saharan Blend BFO-SAH fell to a seven-year lows and Kazakhstan's CPC Blend BFO-CPC hit a two-year low by mid-May.

Libyan grades have been trading at large discounts to their official selling prices (OSP) and even the market favourite - super high quality Azeri Light - has fallen steeply BFO-AZR.

Traders cite multiple reasons for the drops.

Prominent among them is the return to the market of the much missed 1.3 million barrels per day (bpd) of Libyan crude, which dramatically changed the picture from last year, when consuming nations released 60 million barrels of strategic stockpiles.

Second is an overhang of West African crude as the United States, a significant buyer of Nigerian and Algerian grades, is becoming increasingly reliant on new domestic production of sweet crude from its shale reserves in North Dakota and Texas.

Those are estimated to have produced 1.2 million bpd in April, close to the output from OPEC member Algeria.

U.S. imports of Algerian crude are on a steep downward trend from a high of 827,000 bpd in 2007. Imports in February this year were 256,000 bpd, down from the 2011 average of 358,000 bpd, according to U.S. Energy Information Administration data.

Imports of Iraqi crude are shrinking but at a slower rate. February imports were 271,000 bpd, nearly a one-year low, far below the average for the last four years of 480,000 bpd, EIA data showed.


U.S. imports from Africa and the Middle East will fall even further in the months to come owing to the reversal of the Seaway pipeline, which unlocked a crude supply glut in the U.S. mid-continent for Gulf Coast refiners.

Seaway's initial flows will be 150,000 barrels per day, expected to rise to 400,000 barrels per day. BP was already offered two 500,000 pipeline cargoes of U.S. sweet crude from Cushing, Oklahoma, just prior to the pipeline's reopening.

"With the U.S. domestic production rising, we are seeing the arbitrage drying up," a trader in West African crude said.

U.S. data shows oil imports from Nigeria fell to 352,000 bpd in February, the lowest since December 1996, compared with 948,000 bpd a year earlier.

In late April, differentials for Nigeria's Qua Iboe grade BFO-QUA hit multi-month lows as traders cited slack U.S. demand.

U.S. consumption of Iraqi Basra Light grade is in decline just at a time when the country is trying to boost exports.

Traditionally, the United States and Asia are the main buyers of the grade, loaded from Iraq's Middle Eastern Gulf terminal, with a smaller share heading to Europe.

The picture will be however different in June as a plunge in Brent futures has prompted traders to take more Basra Light into Europe to capture a price advantage.

"There are 7 million barrels of Basra Light in storage at Sidi Kerir at the moment plus there is more to arrive still in May," said a trader. "A big volume of crude was initially destined for the U.S."

Iraq's offical selling prices (OSPs) for Europe are priced off Brent. The bill of lading is decided 15 days forward with payment not due until within five days after that period. As a result, traders can boost profits when sentiment on futures is expected to stay bearish.

On the other hand, Basra Light destined for the U.S. is priced off the Argus Sour Crude Index, a monthly average, which does not allow traders to take advantage of a drop in futures.

"I expect an additional 150,000 to 300,000 barrels per day of extra Basra Light hitting the Mediterranean in the second half of June," one trader said.


Asian buyers have been quick to take advantage of the price falls on sweet grades.

At least 6 million barrels, double the usual amount, of Algeria's Saharan Blend is heading to Asia in May as Chinese refiner Unipec, an opportunistic buyer, bought a 2 million barrel shipment citing cheap prices.

Algeria's state oil company Sonatrach is also taking some crude to its storage facility in South Korea, market sources said.

Destinations of Libyan crude grades have also shifted. Asia, and India in particular, has become a new major destination. Indian tenders for light sweet crude are now often filled with Libyan grades such as Mellitah, competing with Nigerian grades.

Most recently, Vietnam has joined the ranks of Libyan crude buyers. PV Oil bought a cargo of Libyan Amna for June arrival.

PV Oil bought 600,000 barrels of Amna crude from European trader Glencore to be delivered in the first half of June, the sources said.

Exports of Azeri Light to Asia have risen in May to 6 million barrels up from the more usual 3 million, traders said. (Additional reporting by Dmitry Zhdannikov; Editing by Anthony Barker)

- Reuters


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