Viewpoint: Tough market would await US oil exports

OREANDA-NEWS. December 17, 2015.  Even if US crude producers win the battle in Congress to lift restrictions on oil exports, they still face tough competition for a larger slice of a global market awash in light crude.

In years past, the Asia-Pacific region had been able to mop up excess volumes of light crude, which would have provided a ready market for US exports. But with slowing demand in the region it is no longer able to absorb all available supplies. This creates hurdles to US crude exports that are beyond the proposed lifting of the long-standing export restrictions. Top lawmakers from both parties appear close to reaching a deal that would repeal the 40-year-old restrictions on crude exports in exchange for extending renewable energy tax credits.

First US crude would need to gain acceptance at overseas refineries. Refiners are typically loath to change the steady, predictable diet of crudes they know work well in their facilities to generate the products that satisfy their supply commitments. To incentivize refiners to try alternate grades, sellers typically sell new crude blends at below market value. But in a low price environment, a seller's ability to provide discount pricing is limited, making it harder for US crudes to even get a foot in the door.

Another issue for US exporters would be transportation costs. While crude exporters from places such as Nigeria have spent years optimizing their transportation logistics, US exporters will have to deal with potentially higher freight costs and longer voyages to most markets. Every additional penny in cost makes the arbitrage to sell US crude abroad more difficult.

And then there is the supply issue. Plenty of countries that have exported light crude for a long time are struggling to place all of their volumes. For US crude to compete, the price might have to be so low that the arbitrage simply may not be economic. This was the case when a number of US companies were cleared to begin exporting lightly processed condensate earlier this year, an opportunity many assumed would become a booming outlet for US production.

Nigerian crude is a prime example of the potential challenges facing US light crude exporters. It is not unusual for Nigerian light crude cargoes to show a backlog of unsold volume at the end of trading months, forcing prices to fall further in order for those volumes to clear. At the end of the first week of December, more than 10 December loading Nigerian cargoes remained available. But as those cargoes became increasingly distressed, they were picked up by Indian refiners at highly discounted prices. This is a common practice among buyers because they know that by waiting, they will still be likely to fill their supply requirements but at a much cheaper price.

In terms of prices, Bonny Light and Qua Iboe — which are well known and widely run light Nigerian crudes — were assessed in early December at much lower premiums against a vastly weaker North Sea Dated benchmark than just a few years ago.

From a \\$3/bl Bonny Light premium to North Sea Dated at the beginning of 2012, it is now averaging closer to 15?/bl above the benchmark since the start of December. North Sea Dated has fallen from around \\$110.50/bl in January 2012 to closer to \\$39.80/bl in December 2015. So a Bonny Light seller who could receive about \\$111/bl in January 2012 is now looking at a market price closer to \\$39.95/bl since the start of December.An influx of competing crudes from the US would likely further deteriorate that price.