Nigeria’s crude oil glut opens US arbitrage opportunities

Part of a growing glut of West African light sweet crude cargoes looks set to arbitrage into North America, following a weakening of differentials and a narrowing of the spread between Dated Brent and US-based crudes.

Much of the overhang of mainly Nigerian crude is expected to flow to Europe, but traders increasingly see an opportunity for a rare diversion into the US market, under favorable arbitrage opportunities.

The WAF to US arbitrage is now open for some import locations but not others, traders said.

“I think the arbitrage to the US East Coast is open but the Gulf Coast is still closed,” a US-based trader said.

Weak buying from Asia for Nigerian and other West African light sweet crudes over the past month has left a large overhang of March and April cargoes, even as trading in May cargoes is well underway.

It is unclear whether the handful of (already loaded) March Bonga and Forcados cargoes not matched to a refiner are now heading to Europe, or waiting offshore.

Meanwhile, light-to-medium sweet grades like Qua Iboe, Forcados and Escravos have experienced softening prices over the last month, enhancing the likelihood of a workable arbitrage to the US, according to traders.

“Only 45% of total WAF programs has moved,” one trader said earlier this week. “At this time of year you’d expect it to be 75%. It’s weighing on the market.”

So far this week, however, industry participants have not observed any specific cargo fixtures.

In the North Sea region, oversupply of light sweet crudes amid European refinery maintenance is also fueling expectations of an arbitrage West, with the Norwegian Ekofisk crude grade top of the list.

Traders said the low Brent-LLS spread and low historical Ekofisk differentials were making this route look increasingly attractive.

Gulf Coast arbitrage on the horizon

A narrow spread between Light Louisiana Sweet — the Gulf Coast benchmark for light sweet crude — and international benchmark Brent has sparked talk of West African crude being an option for import to the US Gulf Coast, but US crude traders say more strength with LLS would be needed in order to make it economical.

US crude traders use the LLS/Brent spread to gauge whether they should source their light sweet barrels domestically, or look to pricier Brent-based crudes.

The issue is complicated by LLS being stranded in Louisiana following the reversal of Shell’s 360,000 b/d then-Houma, Louisiana, to Houston crude pipeline, leaving Texas refiners to pay the roughly $4.00/b cost to barge the crude from the St. James crude terminal.

Another factor affecting demand for West African crudes in Texas is the influx of West Texas Intermediate to the Houston area, with 575,000 b/d being shipped from the Permian Basin on Magellan’s Longhorn and BridgeTex pipelines, and 850,000 b/d of light sweet and Canadian heavy from Cushing on the Seaway crude line.

However, traders say Texas refiners may look more to West African crudes in the months to come as they exit their spring turnarounds and boost already high utilization rates, which stood at 91.1% for the week ending April 3, according to the US Energy Information Administration.

“[West African barrels] may be needed once turnarounds are completed, if there is a concern about sweet crude availability. If so, then LLS could be supported further above WTI [and attracting WAF to the USGC],” one US crude trader said.

West African exports to the US

Once a staple of US Gulf Coast refiners, West African crudes have been almost entirely pushed out of the region, thanks to new shale production in the US.

In 2009, the Gulf Coast was importing 576,000 b/d of Nigerian crude and 218,000 b/d from Angola. The latest preliminary weekly data from the EIA shows that the US has averaged about 86,500 b/d and 25,800 b/d from Angola and Nigeria, respectively, since the start of 2015.

Much of the imports of West African crude to the US are headed to the US Atlantic Coast, which is far more attractive for regional refiners, sources said.

A lack of locally produced crude has led refiners on the US Atlantic Coast to be more beholden to the WTI/Brent spread, as they weigh railing in Bakken from North Dakota, or look to foreign imports, given the high cost of shipping crude from the USGC.

With Bakken by rail currently trading about $5.50/b under WTI, and a freight cost around $8/b to the US Atlantic Coast, in addition to a spread between WTI and Brent around $5/b to $6/b currently, shipments from West Africa are currently limited.

Atlantic Coast refiners in January imported 14,000 b/d from Angola and 6,000 b/d from Nigeria, the latest monthly data available from the EIA showed.

In 2009, the East Coast took 146,000 b/d and 194,000 b/d.

If the spread between WTI and Brent continues to narrow, and offers for West African crudes decline if demand remains tepid, more imports to the Atlantic Coast should be expected, traders said.