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Indian refineries prefer Nigerian crude because of the gasoil yield, and given the country’s domestic consumption growth and product export markets are largely geared towards this product, there has been healthy..

23 Apr 2013

Commodity Online
Factoring in a more long-term horizon, the displacement of Nigerian barrels from the US is adding to additional availability for exports. The growth in light shale oil production has resulted in more than a 60% drop in US dependence on imports of light sweet Nigerian crude.

Over a five-year period, from a peak of 1.08 mb/d in 2007, the volumes have now dropped to 405 thousand b/d last year, with more early indications of displacement seen this year.

As a trend, however, Barclays sees these displaced barrels from the US finding a long-term avenue for consumption in Asia.

Indian refiners have already started showing interest taking close to 18% of the 75 scheduled for export by Nigeria in May.

Indian refineries prefer Nigerian crude because of the gasoil yield, and given the country’s domestic consumption growth and product export markets are largely geared towards this product, there has been healthy appetite for light grades such as Bonny Light and Qua Iboe.

“We expect this structural shift in consumers to take place over the coming months, undeterred by the increasing variability,” Barclays said.

For the crude oil markets, at present the further displacement of Nigerian barrels are unlikely to have a significant effect given the balanced state of market fundamentals. In the Atlantic, there is an improvement in supply availability (especially with light crude grades in the North Sea), whereas there is transient weakness on the demand side in the Pacific given refinery maintenance in Asia, along with weak margins for processing light crude into distillates.

While the above mentioned factor provides buffers for the short term, in a more medium-term horizon, we see a more managed form of anxiety for physical traders in the region with regards to further shortfalls in the Nigerian crude loading programmes due to force majeure.

The ongoing variability in Nigerian crude production has contributed to making the market immune to the frequency and extent of such surprise disruptions, in our view.

For example, Nigerian crude differentials have not reacted strongly to the latest announcement of force majeure on exports of the Bonny Light grade of crude oil in April, with the shutdown of the Nembe Creek Trunkline expected to have animpact on 150 thousandb/d of oil flows.

Premiums for Bonny Light and Qua Iboe are trading at about $3/bbl over Dated Brent this week, very similar compared withthe differentials at the start of the month. Although the premium is high relative to the average, it hasn't expanded further signalling the remits of caution for buyers and the optionality they have with other grades.

Among the West African grades, Angolan volumes have been getting stronger bids recently especially on the back of healthy margins for heavy crude. There are only 10–12 Angolan cargoes left out of 49 for June with volumes being scouted for to actively price into the East, given the narrow Brent/Dubai spread.

The loading programme for Angola on the other hand has been improving on the back of ramp-ups in production from the Saturno field, and although the grades are not like-for-like with those from Nigeria, the extra volumes have clearly given less cause for concern.

Given all these factors, along with the recent improvements in non-OPEC supply shortfalls and the increasing spare-capacity among OPEC suppliers (pegged at 2.7 mb/d, higher than last year by 1 mb/d, we see limited price reaction to crude from possible shortfalls in Nigeria, within the remit of 150 to 200 thousand b/d from current levels.

Meanwhile, there are fresh concerns about the security situation in Nigeria’s oil producing region after a group claiming to be the Movement for the Emancipation of the Niger Delta (MEND) vowed to launch a new wave of attacks this month.

It remains unclear whether this new iteration of MEND (MEND 2.0) has any ties to the once formidable militant organization that inflicted so much damage on the Nigerian energy infrastructure and shut in about 28% of the country’s production between 2006 and 2009.

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