By Jeph Ajobaju, Chief Copy Editor
Nigeria’s Bonny Light and Qua Iboe crude oil were offered around dated Brent plus $2.50, or at a premium of 90 cents to the official selling price at the weekend.
A trade at that level would be the highest since June 2014, according to Refinitiv Eikon data.
Reuters reports that spot activity was subdued after a flurry of Angolan purchases by Chinese refiners while on the Nigerian side, traders waited for more tender results.
Nigerian crude differentials remained strong, while the high offer levels and a number of pending buy tenders were keeping some buyers on the sidelines.
A strong start to 2019
Crude oil markets in Europe and West Africa had made a strong start to 2019 as Libyan supply losses and strong demand in Asia offset rising United States exports.
Earlier last week, Nigeria’s biggest crude grade, Qua Iboe, had been offered at a $2 per barrel (pb) premium to benchmark dated Brent, a 10-month high.
The strength comes as global oil producers led by the Organisation of the Petroleum Exporting Countries (OPEC) embark on supply curbs to boost prices, and due to other supply losses such as Libyan outages and United States sanctions on Iran.
“We would expect some more support to be coming through for physical crude right now,” David Reid, an analyst at JBC Energy in Vienna, told Reuters.
“This is because we see a deficit in the crude balance from a trading perspective, which is quite pronounced this month.”
High demand in Europe, Asia
Outages in Libya, reduced exports from Algeria and a smaller export programme for Kazakhstan’s CPC Blend, as well as the supply cut led by OPEC help boost differentials for lighter West African grades.
Also, a strong demand from refiners in both Europe and Asia for distillate-rich grades pushes up differentials for a number of key crudes to multi-month, or in the case of Nigeria, multi-year highs.
Reuters had noted on January 23 that the Nigerian crude market remained strong, with sellers feeling confident enough to offer Bonny Light and Qua Iboe around their highest in over four years, while Angolan continued to trade at a brisk clip.
Some buyers were reluctant to step in at the levels of $2.50 pb for Bonny Light and Qua Iboe.
However, Repsol loaded a cargo of Qua Iboe bound for its refinery in Peru. The Spanish group previously took Amenam to La Pampilla refinery, which has capacity for 17,000-barrel per day (bpd).
Petroperu has issued a tender to buy 760,000 barrels of either a Latin American, U.S. or West African crude for March loading.
Indian refiner, HPCL, is running a buy tender that could draw in West African crude. The tender closes this week.
Unexpected rally
In other signs of strength, Russian Urals crude in the Baltic BFO-URL-NWE has risen to its highest in five years, predominantly driven by a shortage of similar distillate-rich medium sour crudes.
The rally was not expected by some in the market.
“I am quite surprised,” said a trader focusing on North Sea crude. “I thought there would be more pressure on the market given the extra U.S. barrels that are coming over. But there is huge demand in the Far East and outages in Libya.”
The U.S. – not part of the supply curb of OPEC – is sending more oil abroad and in late November 2018 exported more crude and fuel than it imported, for the first time on record.
Nonetheless, unrest-related losses of crude from Libya’s largest oilfield – similar in quality to Nigerian and North Sea grades – have offset this.
El Sharara, which produces 315,000 bpd, was taken over on December 8 by groups of tribesmen, armed protesters and state guards, and traders say it remains shut.
Libya is not the only place where supply is falling short. Lower supply of Algerian Saharan Blend, as well as a smaller export schedule for Kazakhstan’s CPC Blend, has drawn a number of Nigerian cargoes to northwest Europe.
There, as well as the gains seen in Forties and the other four crudes that underpin dated Brent, traders say the less visible North Sea crudes are already sold out for next month, reflecting a tighter market.
Backwardation
Indicating the same, Brent crude futures for immediate delivery are trading at a premium to the second month LCOc1-LCOc2, as are the short-term Brent swaps called contracts for differences used to price dated Brent, the benchmark used around the world for physical oil trades.
This structure, called backwardation, is a sign of tight supply boosting the value of oil for delivery soon. But the rest of the Brent futures curve to mid-2019 is in the opposite structure, contango, suggesting ample supply.
Some traders do not expect the strength to last, saying supply in the West African market is not tight.
Not all West African crude differentials have risen – those for heavier Angolan grades are down, JBC’s Reid said, adding that poor refinery profit margins in a number of regions were a downside risk.
In addition, this kind of market structure in the CFDs can act as a double-edged sword, traders say.
Having oil sitting idle on a tanker for the journey from West Africa or from the North Sea to the heart of the Chinese teapot industry in Shandong becomes expensive when the market is in backwardation.
“The irony is with backwardation now creeping into the CFDs, my guess is we won’t see any further price rises,” another trader said. “It takes value out of delivered-based pricing shorts.”
Sellers bullish
Even so, sellers are enjoying the moment.
Nigeria’s Qua Iboe is being offered as high as dated Brent plus $2.50 by some cargo owners, the highest since 2014.
“Sellers are very bullish,” a third trader said. “I’m a bit flummoxed as the fundamentals don’t support it.”