OPEC output hike prompts traders to offer deep discounts to attract buyers amid falling demand
The sudden collapse in demand has resulted in a glut of unsold, high quality crude in Nigeria and sent prices at the US Gulf Coast to a discount to benchmark futures, traders said.
London/New York: Crude oil traders from West Africa to the US Gulf Coast are offering cargoes at deep discounts, desperately trying to attract buyers as global supplies swell and demand plunges.
Oil prices have plummeted to 18-year lows as the global spread of the coronavirus has throttled back air and road travel at the same time as major producers are hiking production after Russia refused to back deeper output cuts at a meeting of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies.
The sudden collapse in demand has resulted in a glut of unsold, high quality crude in Nigeria and sent prices at the US Gulf Coast to a discount to benchmark futures, traders said, as Middle East producers flood the market with supplies.
Nigeria, which produces some of the easiest-to-refine crude that typically commands a premium, has 30 or more unsold April-loading cargoes, traders say, equal to 30 million barrels or 30% of daily world demand.
The Nigerian National Petroleum Corp (NNPC) last week put the number as high as 50, and prices for one key Nigerian grade are now at a discount to dated Brent.
Demand for exports from the US Gulf Coast has collapsed, traders said. US exports had steadily increased in the last four years to more than 4 million barrels per day recently, but that is now threatened by the flood of cheaper Saudi oil.
“There are no buyers,” a US Gulf Coast crude trader said. “Refiners in trouble, exporters in trouble, producers in trouble. This is a disaster with no end in sight.”
A lack of options for storage, as well as rising freight costs as Saudi Arabia ramps up shipments, are also deterring buyers. Saudi Arabia’s Bahri shipping unit has booked up to 40 tankers, some of which are for storage. Bahri could not immediately be reached for comment.
Tanks in Cushing, Oklahoma, one of the biggest storage hubs in the world and the delivery point for benchmark U.S. crude futures, are expected to fill to capacity as early as May, traders said.
Crude storage in the Caribbean is sold out already, said Ernie Barsamian, founder and chief executive of The Tank Tiger, a terminal storage clearinghouse in Princeton, New Jersey.
“Cargoes are being severely discounted to move as there are little prospects to export and also very few options to store on ship and/or tanks,” said Scott Shelton, energy specialist at United ICAP.
One trader expected differentials to go lower. Nigeria’s largest crude stream, Qua Iboe, was valued at a premium of $3 a barrel to benchmark dated Brent in December, but this week was offered at dated Brent minus 70 cents, two traders said.
That would be the lowest in many years. Qua Iboe was last valued at parity with dated Brent in 2005, according to Refinitiv Eikon data.
US West Texas Intermediate crude at East Houston, or WTI MEH, flipped to trade at a discount to benchmark US crude this week, traders said.
In Asia, Middle East cargoes for loading in May were offered at wider discounts this week after Saudi Arabia and the United Arab Emirates pumped up supplies of cheap oil to the east in April.
Qatari al-Shaheen crude flipped into a deep spot discount of $3.07 a barrel to Dubai quotes, likely the lowest ever, while Abu Dhabi’s Murban crude was offered at a discount of 50 cents to its official quotes but still failed to attract buyers, traders said. Spot premiums for other crude grades produced in Asia and Russia are also under pressure, they added.
A lack of demand has also depressed North Sea crude differentials, although companies say they are not struggling to sell.
The differential for Forties crude, the largest crude stream underpinning the dated Brent benchmark, has fallen to dated Brent minus 75 cents, the lowest since December 2018 according to Refinitiv data.
May programmes for Nigerian crude will emerge in the coming days and add another 50 cargoes or 50 million barrels to already ample supplies. Traders predict Nigeria will cut its official selling prices (OSPs) for April crude, which are expected imminently.
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