U.S. imports of light crude from across the Atlantic are set to jump this month to their highest in more than two years, according to market sources and trade data that indicate global oil flows are being scrambled by the lowest prices in years and the end of the 1970s era U.S. export ban.
Shipments totaling some 500,000 barrels per day (bpd) are booked or underway from producers including Norway and Nigeria, a surprisingly rapid revival of flows that had dwindled to nearly nothing in 2014-2015, after the U.S. shale oil revolution got in full swing.
The arbitrage has opened as a result of an inversion in the spread between benchmark U.S. crude oil prices and global Brent. After five years at a discount due to the eruption of domestic production, U.S. futures are again trading at a premium of $1 a barrel or more in the months ahead.
Traders are split on whether the revival of the once-routine trans-Atlantic trade rout represents the new normal for markets, or a brief blip.
It may suggest that U.S. oil production is declining more quickly than some analysts estimate, with imports likely to grow as shale drillers slash spending and cut rigs. The U.S. Energy Information Administration said this week it expects output to fall by 700,000 bpd this year to 8.7 million bpd.
But some wonder if the import binge is the result of distorted signals in the futures market. U.S. crude jumped to a premium over Brent in late December, as investors bet the end of the U.S. ban on crude oil exports would eliminate the discount.
"The East Coast is especially sensitive to the Brent-WTI spread. It's cheaper to buy West African or North Sea barrels," a shipping analyst said.
While two U.S. crude cargoes have been exported since the ban was lifted, traders said few are likely to follow. Instead, the spread has made it profitable to import a flotilla of foreign oil - even with U.S. domestic crude stocks 95 million barrels higher than a year ago.
In December, imports of crudes and condensates coming from Africa that compete in quality with U.S. lighter grades, such as the Eagle Ford shale, rose to 10.75 million barrels, up 10 percent from a year ago, according to import flow data available via ThomsonReuters Eikon.
In January 2014, oil imports from Africa had touched their lowest level since 2009, with only 2.87 million barrels, according to the Energy Information Administration.
But this month, more than 15 million barrels of grades such as Nigerian Bonga and UK Brent are set to sail across the Atlantic, according to fixtures and trade sources, which would be the most for any month since 2013, U.S. data show.
With the booking of a Norwegian Ekofisk crude cargo this week, as much as 2.5 million barrels will come from the UK and Norwegian North Sea, traders said, matching the amount sent in August last year, which was the most in two years.
The armada will, ironically, cross paths with the first cargoes of U.S. domestic crude being exported to Europe in four decades after several companies raced to take advantage of the end to a longstanding ban on most overseas sales.
The first of two such shipments were aboard the Panamax tanker Theo T, carrying its historic cargo west into the Mediterranean on Thursday, according to ship tracking data. About a thousand miles due south, Suezmax tanker Nordic Freedom was heading east toward Philadelphia after loading around 1 million barrels of Bonga crude offshore Nigeria.
The unusual cross-shipment of two medium to light crudes highlights what traders say is the questionable financial viability of U.S. exports, which they say have been spurred by political reasons rather than arbitrage economics.
On Thursday, U.S. futures settled at a $1.08 a barrel premium to Brent futures <CL-LCO1=R>, with the spread for later-dated futures trading even wider. June WTI futures settled at a $2.42 a barrel premium to Brent.
With Louisiana Light Sweet - a benchmark for waterborne Gulf Coast crude - trading at roughly a $1.50 a barrel premium to WTI and more than a $2 a barrel premium to Brent, it makes more economic sense to import barrels to the United States rather than the other way around, traders say.
Battle for Market Share
A higher demand of imported crude in the United States is arriving at a bad moment for producers of Latin American crudes, who have been struggling to maintain their market share amid deep budget cuts and weaker demand by U.S. refiners currently shutting deep conversion units for seasonal maintenance.
"More favourable pricing from Middle Eastern crude marketers and a greater acceptance of the new Basrah Heavy grade among US refiners could mean that higher values for sweet crudes are increasingly the new norm, with the recent changes in export legislation if anything helping to underpin this dynamic," said the firm JBC Energy in a report this week.
LLS has been trading this week at a $5.50 a premium to the medium sour Gulf Coast benchmark as refiners scramble to secure light, sweet barrels, its widest spread since mid-October.
Imports of Latin American heavy and medium grades are expected to fall sharply in January, following a 4 percent drop to 68.08 million barrels in December, compared with the same month of 2014, according to Reuters data.
(By Marianna Parraga and Liz Hampton; With additional reporting by Amanda Cooper and Catherine Ngai; Editing by Lisa Shumaker)