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Crude hits lows as market chokes on glut

Published:Wednesday | October 8, 2014 | 12:00 AM

By Anjli Raval in London and Gregory Meyer in New York

Oil tankers have been charting some uncommon courses.

An ever-expanding armada is ferrying United States (US) shale oil from the Gulf of Mexico to the Atlantic provinces of Canada, and bypassing US refineries. Meanwhile, tankers loaded with western Canadian heavy crude are heading to Europe.

And, in South America, cargoes from Venezuela and Colombia that might once have steamed towards the Gulf coast are plotting a course for China.

These unlikely voyages show producers and traders are having to work harder to sell their barrels in a market awash with crude.

The oversupply, despite fears over the impact on energy markets of the conflicts in Iraq and Ukraine, means cutting prices and finding new ports of call - decisions that are reverberating through the global oil system.

Since reaching US$115 a barrel in June, Brent, the international crude marker, has dropped by almost 20 per cent and was trading at the end of last week as low as US$91.48 a barrel - its lowest since 2012.

The sharp decline in prices reflects a market struggling to digest plentiful supply. Booming shale oil output has pushed US production to a 28-year high at the expense of imports, which are falling sharply. Nigeria, for example, did not sell a single barrel of oil to the US in July - only four years ago it was one of the top five suppliers.

And, while the US is still a net importer of crude, the flow of light, high-quality oil from its shale fields is turning into a surfeit and some of it is leaving the country. US crude oil exports are now at the highest levels since the 1950s, with virtually all headed to Canada.

At the same time Opec, the producers' cartel, has boosted volumes to the most in nearly two years as Libya has returned to the market. Russia, too, has been pumping plenty of oil.

Demand is showing signs of softening, both seasonally and, more ominously, structurally. With the US summer driving season now over, refineries' thirst for crude is diminishing and China's slowing economy suggests demand growth will ease in the second-largest oil consumer.

The latest Reuters survey puts Opec production at 30.96m barrels a day in September and Saudi Arabia's output at 9.78m b/d. On the demand side of the equation, the consensus from leading forecasters is for a "call", or demand, on Opec oil of 30.10m b/d in the current quarter, falling to 28.88m b/d in the first quarter of next year.

"Opec themselves put the first-quarter call as low as 28.39m b/d, implying a surplus of 2.57m b/d if September's production level is continued. The prognosis is dire even if Libyan production falls back," says David Hufton, of PVM, a brokerage.

It is against that backdrop that barrels from Russia, South America, west Africa, the Middle East and the North Sea are looking for customers - mainly in Asia, which Mr Hufton says is the only growth market for oil and the one which "everyone wants a piece of".

Nigeria has lifted exports towards Asia's four largest oil importers - China, Japan, India and South Korea - by more than 40 per cent this year over the 2013 level, according to Platts.

And it is not alone. "There is a real fight for market share. More of this crude from the Atlantic basin that has not been going to the US, needs to work its way to Asia at attractive prices," says Giovanni Serio, global head of research at Noble Group, the Hong Kong-based commodities trader. "This change in trade flows has put pressure on the Saudis in a region where they cannot afford to lose longer-term market share."

And so few commentators were surprised when Saudi Arabia lowered prices to customers in Asia last week.

If prices continue to fall, then US "tight oil" wells will approach the point where they will struggle to turn a profit, say analysts.

For now, all eyes are on Opec, which meets in Vienna next month.

"Opec remains optimistic that improving crude demand in the fourth quarter (which we expect as well) will drive prices higher," says Adam Longson, analyst at Morgan Stanley. "As a result, we would be surprised to see any large reduction in production (other than for seasonal demand or outages) prior to the November meeting."

(c) 2014 The Financial Times Limited