Nigeria, one of two OPEC countries completely shielded from any cuts to its oil production, was in line for a windfall from the group’s agreement late last month to shore up the price of crude.
Instead, the beleaguered West African nation is struggling to sell its rising oil production as higher benchmark prices slammed shut trade routes and did little to stem an excess of light, sweet oil, leaving millions of unsold barrels.
The decision in November by the Organization of the Petroleum Exporting Countries to trim output sent benchmarks soaring; dated Brent is now more than 20 percent above mid-November lows. The price boost was good news for oil producers from Texas to Indonesia.
Nigeria, which has been battling militant attacks in its oil-producing Delta region, got a reprieve from cuts along with Libya, which has been pumping at around a quarter of its capacity for much of this year due to its own political turmoil.
But rather than a gold-lined gift, Nigeria’s oil is finding itself cut off from buyers; some 30 million barrels of it has yet to sell, with more loadings due within a week and output steadily rising.
“They’ve just closed their shutters,” one trader said of potential buyers. “There’s no arbitrage,” the trader added, referencing potential trade routes to other regions.
One catch is that the spike in dated Brent, the baseline on which Nigerian exports are priced, made U.S. barrels comparatively cheaper and more attractive.
Because U.S. producers were not part of any cut, the discount of their West Texas Intermediate benchmark doubled relative to Brent CL-LCO1=R to $2.44 a barrel on Nov. 30, the day of the deal, and still stands at more than $2.
This opened a flood of exports from the United States to Asian buyers who might otherwise take Nigerian oil, and boxed Nigerian oil out of its outlet at refineries on the U.S. East Coast.
TIGHTER MARKET FOR SOUR
The other issue is that because Nigeria and Libya are some of the only OPEC producers of “light” crude, nearly all of the cuts will come from “sour” crude, which though usually less valuable because of its higher sulphur is now in demand as buyers await a tighter market for it.
“Buyers are loading as much sour (crude) as they can. The light sweet is not as interesting – there is a glut of it,” said Andrew Wilson, head of energy research with BRS Brokers.
BRS Brokers said there were nearly 12 million barrels of light North Sea oil unsold in ships at the time of the OPEC deal. This whittled down to just under 3 million, but rising production of light crude from Libya, Kazakhstan and Russia means buyers have a suite of choices – and could steer clear of a country whose exports are still seen as unreliable.
“If they start taking crude from Nigeria again, they’re not sure they’ll get it next month,” Wilson said.
Still, even if they are forced to cut price differentials and wait longer to find buyers, Nigeria stands to make some $9 million more for each exported cargo following the deal, which is no small salve to a country battling an economic crisis.
“They’re getting some benefit from the higher flat price,” said Olivier Jakob, managing director of PetroMatrix. The slow sales, he said, “show the need for those cuts – the oil needs to move”.
“If they are respected, the physical impact would be later. It will take some time.”