June 24, 2011 / 2:56 PM / in 8 years

Analysis: West African oil seen distressed by IEA stocks

LONDON (Reuters) - Oil trade from African nations Angola and Nigeria may suffer most from the global oil stocks release as U.S. refiners will opt to cut imports and Asian buyers will bargain hard amid abundant offers from the Gulf.

The International Energy Agency (IEA), announced on Thursday a release of up to 60 million barrels of oil to the market from mandatory emergency stocks.

Half the volume will come from the United States, the world’s top consumer and it will be consumed domestically. The Department of Energy offered 30 million barrels, equivalent to 15 very large crude carriers (VLCCs), of light-sweet crude from the Strategic Petroleum Reserve.

“The 15 VLCCs will be released in the coastal areas in the United States. This will alleviate the need to import West African crude,” a London-based trader with an investment bank said. “This is a direct consequence of the IEA release.”

West African producers, mostly Nigeria and Angola, are key suppliers of light sweet crude to the United States apart from its domestic production such as Louisiana Light Sweet (LLS).

“If U.S. guys can buy light-sweet from the SPR a lot more cheaply than Nigerian barrels on the spot market, they will opt for the SPR,” a physical crude trader with a U.S. major said.

Another trader estimated exports of West African oil to the United States would total about 1.38 million barrels per day (bpd) in June and 1.25 million barrels in July. Physical West African crude trades 40-45 days ahead.

Oliver Jakob with Petromatrix said some cargoes may be diverted from the U.S. Gulf.

“Given the limited amount of storage capacity currently in the U.S. Gulf and in the Midwest it is likely that some import barrels will have to be re-directed to Europe and the Far East, especially crude oil of West African origin,” he said.

Europe and OECD Asia Pacific will account for 30 percent and 20 percent of the 60 million barrel release, respectively. But the breakdowns for crude and oil products are not yet clear.

FLOATING STORAGE

The slowdown of West African flows is likely to depress the tanker market in the short term but in the mid-term could become positive news, said Douglas Mavrinac, analyst with securities and investment bank Jefferies.

“We believe the move could actually have positive implications over the next 3-6 months — including an increase in floating storage with the potential re-emergence of contango in the Brent crude oil strip due to the decrease in the front month oil price,” he said.

Mavrinac also said that demand for oil would increase in reaction to the fall in prices, and that Saudi Arabia may increase output in an attempt to protect its market share.

Other traders said China and India might snap up light sweet crude from West Africa and Caspian producers to benefit from a fall in benchmark North Sea Brent price versus Middle East Dubai crude.

“More IEA crude could soften the Brent-Dubai spread making West Africa or east bound cargoes more workable,” a tanker market source said.

The Brent/Dubai exchange for swaps (EFS) for August tumbled to $4.30 a barrel, down $1.80 from Thursday, Reuters data showed. A narrower EFS spread opens up the West-to-East crude oil arbitrage.

FULL VOLUME?

Roy Jordan, analyst with Facts Global Energy, said refineries in the United States, southern Europe, Japan and South Korea would take some barrels to be released by the IEA. But there may not be enough takers.

“I do not expect that the full volume will be taken up,” Jordan said.

“The IEA itself is uncertain whether the full 60 million barrels will be taken up and will review the situation when the position is clearer.”

In the two previous releases at the wake of Hurricane Katrina in 2005 and the Gulf War in 1991, the volumes of the actually released oils were below the announced volume.

The IEA did not provide the actual volumes.

Even though Jordan forecast not all the volume would be released, the release would lead to some increases in U.S. demand to replenish the SPR over the split periods of time.

“This may open up the arbitrage again,” a trader of West African crude said. “The impact of the IEA barrels may be limited to the near 1-2 months.”

Writing by Ikuko Kurahone, reporting by Simon Falush, Zaida Espana, Jonathan Saul and Dmitry Zhdannikov

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