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European, African oil flows to US as arbitrage re-opens
March 14, 2014 / 1:16 PM / 4 years ago

European, African oil flows to US as arbitrage re-opens

* First spot North Sea cargoes sent to U.S. since January booked this week

* West African imports to U.S. up around 50 percent since January - traders, analysts

* Increase unlikely to be sustained, but more volatility in Arb

By Simon Falush and Selam Gebrekidan

LONDON/NEW YORK, March 14 (Reuters) - U.S. imports of West African and European crude are recovering once again after shifting arbitrage economics made these shipments cheaper than railed Bakken oil from North Dakota.

This week, BP booked a cargo of Norwegian crude oil to be shipped to Philadelphia later in March, while another vessel of North Sea crude oil was booked by Total to go to the Caribbean.

This was the first time since January that any spot North Sea cargoes have been booked to move to the United States other than for term deals, traders said.

Traders have reported a pick up in West African crude oil cargoes to the United States which the U.S. Energy Information Administration (EIA) data showed had ground almost to a halt last year.

Preliminary import data from the U.S. EIA show three suezmax-sized cargoes arrived from Nigeria in late February and early March and another from Angola in late February.

While sporadic shipments have arrived from both countries over the last few months, a steady if small stream has established itself since February.

Four-week average imports from Nigeria alone stood at 110,000 barrels-per-day last week, the highest level this year, according to EIA data.

Market sources and analysts say there is around 50 percent more oil per month travelling across the Atlantic in late February and March compared to January and late last year.

For years, a surge in U.S. domestic oil production and the cheap cost of shipping Bakken crude oil to the East Coast via rail cars had dried up imports from across the Atlantic.

Indeed, Nigerian imports to the United States stood at 93,000 bpd in November, the lowest level since February 1983. They recovered only slightly in December to 99,000 bpd.

They reached a peak of 1.4 million bpd in 1979 and were above 1 million bpd for much of the 2000s.

This slump had been encouraged by a growing premium of European crudes to oil originating in North America.

However, Brent crude’s premium to U.S. crude dipped to its lowest since October earlier in March to below $5.50, though it has since recovered.

European and West African grades of crude oil are benchmarked against Brent.


Louisiana Light Sweet and Bakken crude have become less competitive against Brent crude due to increased transportation costs.

Differentials for Bakken shale oil for delivery at Clearbrook, Minnesota, were much stronger for most of this year after it became clear weather was going to severely affect production.

“Bakken might not have been very attractive to U.S. Atlantic Coast refiners due to price considerations,” said David Wech, analyst at JBC Energy in Vienna.

”But (this is) possibly also based on reduced availability following disappointing production levels due to harsh winter weather and logistical hiccups in line with rail safety issues. “West African crude would be the natural replacement.”

December output from the Bakken and Three Forks shales in North Dakota fell by nearly 50,000 bpd from a record high over 910,000 bpd in November, as a series of snow storms and wind chills cut into production.

Output was nearly unchanged at just over 870,000 bpd in January, according to the latest reports from North Dakota regulators. [ID: nL2N0MA1SY]

Differentials went from as low as $15.50 under U.S. crude futures in early November to $2.50 under in early January as output fell, although this strength has eased for barrels due to be sent in April.

On Thursday, North Dakota Sweet (Bakken) oil for April delivery at Clearbrook traded at $6.00 a barrel under the front-month U.S. oil futures contract.

Meanwhile, it costs somewhere between $14 and $17 a barrel to get that oil from the northern Midwest state to refiners along the U.S. East coast, according to a recent report published by Valero Energy. That compares with previously published estimates from Tesoro Corp that pegged the cost at $9 to $10 a barrel.

In fact, refiners may soon see these costs rise after a series of accidents involving light sweet Bakken oil brought intense regulatory scrutiny to the practice of shipping oil by rail.

Many analysts expect new safety measures to add to the cost of transporting Bakken to the East Coast aboard freight trains.

Market participants think it very unlikely that there will be a sustained shift to a significant arbitrage for cargoes to head west across the Atlantic, but there will likely be more volatility in flows, as transport economics shift said Olivier Jakob at Petromatrix in Zug, Switzerland.

“There have been big changes in transport capacity, and there will be more swings as transport economics change,” he said.

One factor which could close the arbitrage window would be a sustained release of the Strategic Petroleum Reserve, which would put pressure on the price of U.S. crude relative to Brent.

Indications that this may happen came from the fact that the United States launched its first test sale of crude from its emergency oil stockpile since 1990.

“A brief recovery in exports to the U.S. could be halted after a U.S. reserve release,” a trader of West African crude said.

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