NEW YORK (Reuters) - Delta Air Lines Inc’s refinery near Philadelphia has embarked on its biggest buying spree of Nigerian crude oil in more than a year, market sources say, snapping up distressed cargoes as the U.S. market tightens.
The spate of purchases, which one source estimated could reach as high as 5 million barrels over the next month or so, show how the global oil market is seeking to rebalance itself. Months of low prices, and unrelenting OPEC output, have created a growing surplus in European markets, but have halted growth in the U.S. shale patch, reviving once-common arbitrage deals.
The switch shows how the narrowing gap between U.S. and global oil prices is forcing East Coast refiners to once again adjust to an oil market in flux, just a few years after spending millions on rail terminals to tap into surging North American output. Less than two months ago, Delta was boasting about its ability to shun West African crudes for domestic and Canadian sources.
The first shipment of roughly 1 million barrels of Qua Iboe crude is on its way to the 185,000 barrel-per-day refinery in Trainer, Pennsylvania aboard a Liberian-flagged vessel called SCF Sayan, according to trading sources. It will be the first cargo from Nigeria since last May, according to U.S. data.
The company purchased a second cargo of 1 million barrels of Qua Iboe to be delivered later this month, trading sources say. One market source said Delta had this week purchased a third cargo as well, this time Forcados.
In total, the refinery is preparing to run up to 5 million barrels of Qua Iboe, with deliveries extending into August, a source familiar with the plant’s operations told Reuters.
The plant has not imported more than two million barrels of Nigerian crude in any month since June 2013, according to data from the U.S. Energy Information Administration. Prior to the shale boom, it routinely bought that much.
West African oil traders have yet to see such sizeable purchases, but note that surplus Nigerian crude – including Qua Iboe – has been put into storage and could easily move to East Coast destinations with little notice.
Adam Gattuso, a spokesman for Monroe Energy, the subsidiary of Delta that runs the refinery, said the company does not comment on operations.
“The refinery will always pursue the most competitive crude oil from both an economic and quality perspective,” Gattuso said.
With the U.S. awash in light-sweet oil, U.S. refineries have relied less and less on West African crude for their supplies. Imports from Nigeria also shrunk from almost one million barrels per day in 2010 to about 60,000 bpd this year, EIA data show.
“In the first quarter we were a hundred percent North American crude... We are no longer importing cargoes regularly from West Africa,” Delta Chief Financial Officer Paul Jacobson told a Bank of America Transportation conference in May.
But in recent months, U.S. oil has traded at much smaller discounts to the global benchmark Brent, making foreign imports much more attractive. Struggling to find buyers, unsold cargoes of West African crude began to stack up.
The Brent/WTI spread traded at less than $5 a barrel in all of June, and the premium for Qua Iboe crude over Brent has fallen to just 45 cents, nearly the smallest since it traded at parity a decade ago.
The narrowing spread has made it about $2 a barrel cheaper to import West African crude than to ship Bakken by rail from North Dakota, according to one trader.
This has also hit U.S. rail volumes of crude oil, with overall petroleum traffic down 1.1 percent this year, according to data released Wednesday by the American Association of Railroads.
Ultimately, Monroe’s buying spree, and other trans-Atlantic shipments, should help rebalance the market, a process that has accelerated this week. On Wednesday, the Brent/WTI spread widened to more than $5 a barrel for the first time in three weeks, having ballooned by more than $1.50 in two days.
Reporting By Jarrett Renshaw; Additional reporting by Libby George in London; Editing by Bernard Orr