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Spud a new well in Alberta and shut one in the Niger Delta. We are not quite there yet but the North American oil boom is already having a dramatic effect on crude oil trade in the Atlantic Basin. Imports into the United States of West African crude oil are declining rapidly and oil industry analysts are already chattering about a glut of light sweet crude in the North Atlantic with African producers forced to cut their premium prices in search of alternative buyers in the Far East.
Nigeria's gassy, sulfur free grades, such as Bonny Light and Qua Iboe, have for decades been a product of choice for U.S. refiners keen to maximise the gasoline output from every barrel of crude. But in recent months, the numbers of cargoes heading to U.S. ports from Forcados in the Niger Delta have been falling steadily. According to data from the U.S. Energy Information Administration, Nigerian crude imports plummeted in December to about 250,000 barrels per day, half the rate of import in the summer and a far cry from the million bpd Nigeria was supplying America in 2010. Angola too is suffering from America's weakening appetite with daily imports falling from 236,000 bpd in September to 115,000 bpd in the final month of 2012.
West African producers will look to the east for alternative customers but it's not just a simple question of changing orientation because Asia's refiners tend to be geared for a different product, the more sulfurous and heavier crude blends that originate in the Persian Gulf. But the real problem is that U.S. refiners on the Gulf coast are beginning to see continental shale oil as a reliable feedstock. The reversal of flow in the Seaway pipeline has begun to unlock the bottleneck of oil in Cushing, Oklahoma by providing an escape route to the Gulf coast of Texas. Further volumes of shale oil are being moved south by rail car and barge. The big question is, what will this do to oil prices?
You can already see the impact of shale oil in the $20-plus discount in the price of West Texas Intermediate compared to North Sea Brent and even bigger discounts in the price of Canadian crude. Access to Gulf coast ports may narrow that discount but some analysts are betting that the bigger impact will be on the Gulf of Mexico price benchmark, Light Louisiana Sweet, which is currently linked to Brent, and priced at a dollar or so discount as the premium light Gulf coast crude.
If large volumes of American shale oil begin to fill Texas refineries, shutting out African crudes, the LLS benchmark may begin to decouple from Brent, the benchmark for African crudes. In that case, we would see a complete hemispheric change, with oil on the North American continent priced differently to the rest of the world. How long can this can continue? What we have learned over the past few years is that trade flows are still more important to the pricing of energy than financial markets. What matters in energy pricing is the cost at the refinery gate, not the machinations of hedge funds in London and New York.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished