Nigeria’s crude exports to US may increase with drop in shale production

*Crude oil vessel.

*Crude oil vessel.

Oscarline Onwuemenyi,
with agency reports

06 April 2016, Sweetcrude, Abuja – Nigeria’s crude oil export to the United States may see a revival as the drop in shale production has forced the US to resume crude oil imports.

With this development, the US is back to being a big importer of crude oil again after a very sharp fall in its production.

Bloomberg reports that US oil production has dropped by about 600, 000 barrels per day since peaking in 2015, and imports have filled the gap as the American industry is hoarding foreign crude.

According to the US Department of Energy, a combination of increased shale production and other factors, earlier in 2014, saw Nigeria oil sales to the US drop to a trickle of about 100,000 barrels per day but completely stopped in July.

Nigeria did not export a single barrel of crude to US-based refiners in July 2014 for the first time since records started in 1973.

Preliminary data suggest the trend continued in August and September. However, at its peak in February 2006, the US imported 1.3million barrels per day from Nigeria.

By 2012, Nigeria was already selling just 500, 000 barrels per day, but was still one of the top-5 suppliers to the US, alongside Saudi Arabia, Canada, Mexico, and Venezuela.

To be sure, US crude oil imports are rising for the first time in more than five years, a sign that Saudi Arabia is winning its war for market share against shale producers, according to the US Energy Information Administration.

US daily crude imports averaged 7.9 million barrels per day over the last 13 weeks, 9.8 percent higher than the year before. “That’s not a one-week blip,” Tim Evans, an energy analyst at Citi Futures, told Bloomberg. “We see a consistent pattern.”

Faster imports were driven by a surge in oil deliveries from Saudi Arabia, Venezuela and Nigeria, which cleared US customs over the seven day period. Reported imports are subject to a considerable week to week variability depending on the timing of tanker arrivals and customs clearance, so it is important not to place too much emphasis on one week’s figures.

But there is no mistaking the trend. Crude petroleum imports have been trending higher since the middle of 2015.

Imports are rising thanks to a combination of strong demand from US oil refineries and falling domestic oil production from shale formations.

Crude is also being imported and put into tank farms. Traders favour storage in the United States because it is a location of net consumption and has favourable banking, legal and physical infrastructure.

US producers, who reaped the benefits of the shale revolution, no longer enjoy a steep price advantage over foreign rivals in selling to domestic refiners. Now refineries are buying foreign oil to replace the lost US output–and, along with traders, are storing much of the less-expensive imported oil to sell when prices rise, Bloomberg reported.

The irony of the shale boom, and all the light crude it unlocked is that it came just as US refiners were spending billions to process heavy oil.

The US is hoarding a lot of the imported oil. As of March 25, US commercial crude inventories hit 534 million barrels. That is near the all-time high in 1929, when US commercial storage hit 545 million barrels, as huge oil finds coincided with the beginning of the Great Depression.

As long as futures prices remain higher than current ones, the incentive will remain to pump oil and store it. That leaves the US stuck in a strange pattern where “the higher inventories go, the more downward pressure that puts on near-term prices, which only increases the incentive to store it,” says Citi Futures’ Evans.

The only way to break that cycle is for interest rates to rise, says Philip Verleger, an energy consultant and former director of the office of energy policy at the Department of the Treasury, which would increase the financing costs to build storage tanks. “As long as money is cheap, it’ll make sense to create storage tanks in the U.S.”

But there could be a political cost if the market share strategy is pushed too far, in the form of a backlash from the United States, Reuters’ John Kemp explains.

“The rise in U.S. domestic oil production and reduction in imports has been hailed by policymakers from both major parties as a significant achievement,” he says.

“Even if the concept of “energy independence” is an illusion in an interconnected oil market and global economy, rising domestic production has contributed to an improved sense of energy security,” he said. “But if the price war continues to harm domestic oil producers, it is likely to trigger a political response at some point.”

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