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U.S. Shale Is Upending Crude Flows In This Oil Frontier

Tsvetana Paraskova

The U.S. shale boom is upending global oil markets as far as crude flows from West Africa to Europe and other parts of the world, and is squeezing in particular Nigeria’s struggling oil industry.

As one of Africa’s top producers, Nigeria is contending with increasingly stiff competition from U.S. light grades on the global market in order to keep its traditional sales destinations.   

Moreover, Nigerian exports to the U.S. have been declining in recent years because the U.S. pumps growing amounts of comparable light crude grades.  

As a result, Nigeria’s crude must compete with U.S. oil—not only in America, but also in Europe and Asia.

Immediate future demand for Nigerian oil is expected to hold up at least for now, as European refiners are buying more light crude to process and export to America as the driving season approaches, and as demand in Southeast Asia—India and Indonesia in particular—supports the prices of the key Nigerian crude grades, says Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, at IHS Markit.  

However, Nigeria faces stiff competition in Europe from U.S. crude, Caspian crude, and North Sea crude, and European refiners are not particularly happy with higher Nigerian crude prices.

Nigeria must also fight for market share in oil-thirsty India, where an Indian state-owned refiner has just signed a first-term contract to purchase American oil.

Despite signs of steady demand for Nigerian oil in the coming months, going forward, Nigeria may have to look for new markets for its oil, according to traders.  

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Nigerian exports of crude oil to the U.S. have been on a downward trend for nearly a decade, and the drop became even more pronounced last year when U.S. shale production was beating production records week after week.

This summer, Nigerian oil flows to the United States may find some hope as the market is starting to show some interest in Nigeria’s Bonga grade, and as U.S. drillers cut spending and scale back production, this could also benefit Nigeria’s oil, according to IHS Markit.

“Moreover, the US might experience some further decline in terms of oil well productivity in the Texas’s Permian basin, which could be good news for Nigeria,” IHS Markit’s Katsoulas says.

Nigeria must also compete with U.S. oil for another of its key markets, Europe.

While European refiners could buy more of Nigeria’s light oil ahead of the summer driving season, traders are not happy with the premium of key Nigerian grades to dated Brent, especially when there is cheaper available light oil from the United States, the North Sea, and the Caspian Pipeline Consortium (CPC) crude.

“We have many options that mean Nigerian won’t work for us at these prices,” a trader told Reuters last week, when Nigeria’s key export grades Bonny Light and Qua Iboe were being offered at or above a $2 a barrel premium over dated Brent.

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Steady demand for Nigerian crude in Asian countries like India and Indonesia have propped the prices of Bonny Light and Qua Iboe to a near five-year high, according to shipping and trading sources quoted by Reuters.

Nigeria, however, should follow closely how its U.S. competition will play on the Indian market, “as the US have started targeting Indian refiners,” IHS Markit’s Katsoulas notes.

In February this year, Indian Oil finalized a US$1.5-billion term contract to import U.S. crude grades “as a part of its strategy to diversify term crude sources.” This was the first term contract that an Indian public sector undertaking (PSU) in the oil industry had signed to import American crudes.

If the U.S. presses on with more oil sales to the Indian market, Nigeria will have another front on which it must compete with what is now the world’s top oil producer and what was a big buyer of Nigerian crude just a decade ago.

Facing competition in nearly every corner of the oil market, “Sooner or later Nigerian oil is going to need to expand into new markets,” a trading source told Reuters last week.

By Tsvetana Paraskova for Oilprice.com

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