Wednesday, May 5, 2010

Nigerian Oil Flow To US Slowing Amid Crude Stocks Glut

By Angela Henshall and Paddy Gourlay

LONDON (Dow Jones)--Cargoes of Nigerian light sweet crude are struggling to find buyers in the U.S., traders of West African crude said Tuesday.

Demand for imported oil across the Atlantic is flagging amid high stock levels, while rising freight costs have worsened the arbitrage economics from West Africa to the U.S. and prices for Nigerian barrels are starting to fall as a result.

Spot premiums for Qua Iboe, one of Nigeria's main grades, slid Tuesday to a premium of around $1.10 over dated Brent - the North Sea benchmark - compared with $1.25 to $1.35 a few weeks ago.

"From what I can gather from my U.S. side, demand is still muted," said a trader. "There is still a very long list of availabilities on a daily basis, both floating barrels and newly arrived waterborne [cargoes]."

U.S. oil stock levels have been rising over the past few weeks, widening the contango--where the front-month contracts are trading at a discount to longer term contracts--in the main U.S. benchmark crude, called West Texas Intermediate.

Front-month June WTI fell to a discount of $3.15 below July WTI Tuesday. This partly reflects a localized supply and demand balance at Cushing, Okla., where WTI is stored.

However, arbitrage economics from West Africa have still deteriorated sharply this month. Deals for Nigerian barrels are often priced against Dated Brent, and then sold later as cargoes on the water or seabourne cargoes, against WTI benchmark, so the changing relationship between the two markets can quickly alter the arbitrage economics.

Front-month WTI fell below Dated Brent, the European benchmark, for the first time this year on April 12, but is now trading at a discount of around $3.15 Tuesday.

Louisiana Light Sweet, the main light sweet crude grade in the US Gulf, was trading at a premium of more than $5 a barrel above June WTI Tuesday, but was still cheaper than West African grades, traders noted.

"To break even Qua would probably have to sell at a premium of $6 over West Texas Intermediate, which many buyers find off-putting." said one London-based trader.

Rising freight costs have added to the pressure. Suezmaxes charters to the U.S shot up to $50,000 a day last week for the first time since January, adding to the pressure on Nigerian oil exporters. One trader said tankers currently heading to the US Gulf may turn around in the coming weeks.

Prices for Nigerian barrels will likely fall further this month, traders added, particularly since Nigeria's state oil company has just issued one of its biggest oil export programs in several years for June.

But the falls may be mitigated if one of Indian refiners issues a large tender, the traders added.

Indian refiners have issued a series of monthly buy tenders in 2010, in line the country's move to introduce low-sulfur Euro-IV grade gasoil and gasoline, another such tender could prop up prices.

Meanwhile, the glut of oil stocks looks set to keep growing. U.S. crude and product inventories built by 23.6 million barrels over the past two weeks, with imports up close to 600,000 barrels a day, according to Department of Energy data.

The data this week is expected to show crude stockpiles rising by 600,000 barrels, according to the mean of six analysts' forecasts gathered by Dow Jones Newswires.

-By Angela Henshall, Dow Jones Newswires; +44 (0)20 7842 9285;

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