(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, June 5 (Reuters) - Rising shale oil production in the United States has slashed light oil imports from countries such as Nigeria and Algeria by more than half in the past two years.
The unexpectedly rapid growth in shale oil output has rightly been termed a supply shock by seasoned observers, but it is also a quality shock.
“U.S. light tight oil is distinctive in that rising production is causing an unexpected quality shift in the global crude mix,” the International Energy Agency (IEA) said last month.
“The shockwaves of rising U.S. shale gas and light tight oil ... are reaching virtually all recesses of the global oil market,” the IEA wrote in its 2013 Medium-Term Oil Market Report.
“These powerful forces are redefining the way oil is being produced, processed, traded and consumed around the world. There is hardly any aspect of the global oil supply chain that will not undergo some measure of transformation over the next five years,” the agency concluded.
In the first three months of 2013, U.S. refiners cut their crude imports to just 681 million barrels, down from 785-800 million barrels in the same period in 2012 and 2011.
The reduction has fallen entirely on light grades, those that compete most directly with similar domestic production from shale plays such as the Bakken and Eagle Ford. Imports or medium and heavy crudes have actually risen over the past two years.
According to the Energy Information Administration (EIA), imports of light crudes with an API gravity of 35 degrees or more fell to just 76 million in the first quarter of 2013 from 130 million in the same quarter in 2012 and from 162 million a year before that.
Chart 1: link.reuters.com/zyh68t
Chart 2: link.reuters.com/caj68t
Imports from Nigeria, which produces mostly very light low sulphur oils, have fallen more than 52 million barrels, while crudes from Algeria were down by 21 million barrels.
By contrast, imports of medium and heavy grades testing 30 degrees API or lower are slightly higher since 2011 (Charts 1 and 2).
Legal restrictions prevent U.S. oil production being exported.
But by displacing an equivalent volume of light crude from Nigeria and Algeria, and forcing those countries to find new markets in Europe and Asia, U.S. shale oil is effectively making its way onto the global market.
In consequence, the global crude slate is becoming lighter (and sweeter), radically altering the pricing relationship between light-sweet and heavy-sour oils, and slashing the traditional premium refiners have to pay for light grades such as Brent.
At the same time, demand from refiners is shifting to heavier oils which yield more diesel, as improved vehicle fuel efficiency and ethanol blending mandates nibble away at gasoline consumption in the United States.
North American shale production is expected to expand another 2.3 million barrels per day by 2018, and account for well over 25 percent of global incremental output, according to IEA.
Before the shale revolution, the consensus view was that the global crude slate would become heavier and sourer, as dwindling output from high-quality fields in the North Sea and elsewhere forced refiners increasingly to rely on marginal supplies of heavy, tarry crudes from Saudi Arabia, Venezuela and Canada.
Refiners in the United States and Asia responded by investing heavily in units to strip out the undesirable sulphur and convert the heavy residuals left over from processing heavier and sourer crudes.
Shale has upended all those calculations. Crude from the Bakken typically tests at 40 degrees API or even more. Saudi oils are often 30 degrees or lower. Venezuela’s crude is often below 20 degrees and sometimes as low as 10.
Shale oil is a “good fit for some U.S. refineries which had seemed on the brink of closure, (but) the supply boom is proving a challenge as well as an opportunity for others, which had bet on a widening heavy-light price spread and invested massively in upgrading capacity,” according to the IEA.
The impact is not confined to the United States. As light crudes from Nigeria and Algeria are displaced from North American refineries, they must find new markets in Europe and Asia, where they compete with local supplies such as Brent and Malaysia’s Tapis.
The unexpected lightening of the crude slate has thrown a lifeline to refineries on the U.S. East Coast and in Europe which had failed to invest in expensive conversion equipment. It has also shifted the balance of power within OPEC even further away from light producers in Africa and towards the heavier oil producers in the Gulf.
Rather than selling into the Atlantic Basin, African light oil producers are being forced to reorient their exports towards Asia, where shipping routes are longer, and refiners have more flexibility and can drive a harder bargain, eroding the traditional premiums which their exports have commanded. (Editing by Jason Neely)