Nigerian light sweet barrels thrive but rare tight market may not last

Light sweet crudes from West Africa, which have for years been in a state of glut, are experiencing a rare physical tightness amid robust demand, which has seen differentials climb to multi-year highs.

A combination of improving demand -- as fears over the pandemic ease -- reduced competition from the likes of light sweet Libyan barrels and spluttering domestic crude production have all helped push up prices to a significant premium to Dated Brent.

But traders are still unsure whether this will last, as outages from Libya and Kazakhstan diminish, along with some signs that buyers may soon not be as willing to keep paying these premiums in the coming weeks.

Nigeria, which produces high quality light sweet crude oil, has also seen its production slump to multi-decade lows, due to operational, technical and sabotage problems.

Previously drawing strength from expectations of lower supply from Libya and Kazakhstan, Europe-focused crudes have been booming, and value for February-loading cargoes of Nigerian staples such as Forcados, Egina and Escravos were above Dated Brent plus $2/b, according to traders.

S&P Global Platts on Jan. 17 assessed Bonny Light at Dated Brent plus $2/b. It was last assessed at the same level in June 2019 and has not been higher than that since June 2014.

"Nigeria has been super tight because of supply issues," one of the traders said. "Bonny [Light] is a big stream that has been pretty much offline and Forcados and Brass River have production issues too."

Tight supply picture

West African oil producers have encountered some problems marketing their crudes over the past decade and, as sourer and heavier barrels have been more economical for many refiners, with complex secondary units. These countries have been forced to cut prices to sell barrels, with low prices, oversupply and high stocks remaining fairly constant during this period.

But the picture has changed somewhat in the past few months.

Persistent supply outages in Nigeria -- which severely hampered the amount of crude tradeable in the spot market -- and steady baseload demand from India were other key factors boosting levels, traders say.

"[Indian buyers] have been supporting the market and can be the deciding factor in some months," said one trader, as players started to think about the amount of March crude tradable in the spot market, with fresh loading programs due imminently.

Baulking at the high cost of Mediterranean sweet grades, refiners there had recently bought Nigerian barrels too, with Turkey's Tupras taking cargoes of Bonny Light and Forcados, a second trader said. That demand has kept the market tight.

Market talk has started to turn to the longevity of the support, though, and there were signs that buyers may soon not be as willing to pay up for oil.

"Demand is fairly robust, but then you have 400,000 b/d extra from OPEC+," a third trader said. "[Refinery] margins are still decent, and stocks are not overflowing, but the flat price and [Dated Brent] structure is starting to bite."

Another trader was of a similar view: "With Libya back and Dated [Brent] strength, the differentials are easing now."

A steep backwardation in Dated Brent –- of as much as 70 cents/b between prompt week Brent contracts for difference information – is particularly punitive for West African oil, as the relatively long sailing time to key buyers carries with it the cost of that Brent structure.

Traders were now eyeing the start of the March trading cycle for West African crude with little unsold February-loading oil and a healthy demand outlook. Nigerian crude, relies heavily on demand from Europe and India,

Nigeria has the capacity to pump around 2.2 million b/d of crude and condensate, but in 2021 output languished near 1.55 million b/d, according to S&P Global Platts estimates.

Nigerian crude is largely low in sulfur and yields a generous amount of diesel, jet fuel and gasoline, which are the profit-making products for global refineries.

But has emerged as the swing barrel in the past few years. It may have the geographical flexibility to sell oil east or west as demand requires, but it faces increased competition from many producers, and has been particularly affected by the dramatic rise in US shale production, which is alike in quality.