Facing record oversupply, U.S. oil looks for a home in Europe

LONDON (Reuters) - As U.S. oil inventories reach all-time highs, cargoes of crude are increasingly flowing towards Europe, where higher prices and lower shipping costs have made the region an attractive hunting ground for those selling light sweet oil.

Pumpjacks and other infrastructure for producing oil dot fields outside of Watford City, North Dakota January 21, 2016. REUTERS/Andrew Cullen

Sources told Reuters at least three cargoes of U.S. crude that are likely to cross the Atlantic from the U.S. Gulf Coast in the coming few weeks.

Others said offers of a variety of grades, particularly WTI, are coming for April and May arrival for buyers who want them.

Since the U.S. Congress late last year abolished the more than 40-year-old restriction on U.S. crude exports, Reuters data shows a number of cargoes of crude, in addition to ultra-light condensate or fuel oil, have reached Europe and the Mediterranean.

“A decent amount of U.S. crudes are now being shown into Europe – mostly light grades. Some majors are already offering,” a trader said. It had the potential, the trader added, to “put some pressure on the sweet North Sea and Mediterranean.”

U.S. crude oil stocks are now at a record 518 million barrels, after one of the largest weekly builds in the last year, according to the latest figures from the Energy Information Administration. [EIA/S]

The window of opportunity to sell into Europe, or arbitrage, as reflected by the premium of benchmark Brent LCOc1 over WTI crude futures CLc1, is around $3 a barrel, up from a discount of around 90 cents in early January.

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The more favorable price spread is driven in part by supply disruptions in Europe, including a force majeure on Nigeria’s Forcados, a European refinery staple, that sources said could last until March as well as disruptions to Kurdish oil supplies.

Trading sources said Valero, P66 and Russia’s Litasco were among the companies lining up tankers to take U.S. crude to Europe, although it was not immediately clear whether all these cargoes would contain crude or some would contain condensate.

It has combined with a drop in freight rates over the last few weeks to make the economics of shipping to Europe potentially attractive.

“We’re looking at what needs to come into northwest Europe instead of the Forcados cargoes from Nigeria. That may mix up the needs of northwest European or Mediterranean refiners which may be able to take some U.S. (crude) if it works,” another refiner said.

In northwest Europe, differentials for physical barrels of oil have risen to around their highest since the start of the year. [CRU/E]

Meanwhile, the cost-effectiveness of running some of the more plentiful North Sea crudes, such as Forties or Ekofisk, has deteriorated sharply, in line with a drop in European gasoline refining margins and a strengthening dated Brent price.

Running Forties or Ekofisk is at its least cost-effective in almost two years, according to Reuters data, which might mean there is an incentive to try out other grades, traders said.

Most of the most recent round of offers for U.S. deliveries right now are for April or May arrival.

“More and more assays are coming into our in-boxes,” another refiner said, adding they had a choice of grades.

Many European refiners face the problem of not having run a U.S. crude through their systems in living memory and, as such, are wary of doing so, even though on paper, the numbers might make economic sense.

“We don’t know the crudes, so we need time,” another refiner said.

Reporting by Amanda Cooper; Editing by David Evans