Oil trade in throes of historic shift

Oil rigs are popping up in the farmlands of Harper County, Kansas, where an oil boom is underway.

Story highlights

  • The International Energy Agency forecasts a decline in crude trading until 2017
  • Production has rebounded in North America, changing import and export patterns
  • The changes in the global map center on North America, where refiners will cut imports
  • Middle East crude exports are expected to decline over the next five years

Mexico, Nigeria, Saudi Arabia, UK, Venezuela: the origins of tankers docking at the Texas port of Corpus Christi once read like a roll call of top oil-exporting nations.

The list has now shortened. And, for the first time since the 1940s, the port is handling outbound crude shipments as millions of barrels flow from the nearby Eagle Ford shale region.

"It's unbelievable," says Frank Brogan, deputy port director. "Imported crude was our mainstay cargo for decades."

Corpus Christi is at the centre of a historic shift under way in global crude oil trading. As production has rebounded in North America, import and export patterns are changing. The International Energy Agency forecasts a decline in intercontinental crude trading until 2017, reversing years of steady growth.

"The global oil map will be redrawn over the next five years," says Maria van der Hoeven, executive director of the IEA, the western countries' oil watchdog.

By 2017, 32.9m barrels a day of crude will trade between different regions of the world, 1.6m b/d less than last year, the agency estimates. The drop is likely to have ramifications for national balances of payments and the energy industry.

The new trading map will also change the price relationships of crude oil streams, forcing the world's energy traders, including Swiss-based Vitol, Glencore, Trafigura, Gunvor, Mercuria and the trading arms of BP, Royal Dutch Shell and Total, to rethink how they do business. It could also hit demand for vessels from supertanker companies, including Bermuda-based Frontline and US-based OSG.

The changes in the global map centre on North America, where refiners will cut imports by a hefty 2.6m b/d, equivalent to the current production of Kuwait, as output increases in Canada and US states such as Texas and North Dakota.

The shift in imports will be uneven across different crude streams, with refiners likely to rebuff overseas offers of premium-quality, "light, sweet" crude. The US has this year halved imports from Nigeria, a supplier of this type of oil.

"We see light, sweet imports maintaining their steady pace of decline of 400,000 barrels per day per year. So by 2014 they will be very, very low levels," says Thomas Waymel, head of crude at Totsa, the trading arm of Total of France.

Refineries on the US Atlantic coast are finding novel ways to substitute foreign barrels with surging indigenous production. The boom in US domestic output has depressed the cost of West Texas Intermediate, the local benchmark, against other streams. This week, the WTI-Brent discount widened to more than $24 a barrel, a one-year peak and nearing the record high of more than $28 set last year.

In Albany, the New York state capital, energy logistics and trading company Global Partners is emptying trainloads of domestic crude into barges, sailing it down the Hudson river and selling it to refiners. "It's a better alternative to west African [oil]. You're going to end up backing out those crudes," says Eric Slifka, chief executive.

The other big change in the global oil map is expected to be a reduction in Middle East crude exports over the next five years. The IEA believes that the region will by 2017 export about 1.9m b/d less than last year.

Two forces explain the looming drop. First, the region will refine more crude locally. In Saudi Arabia, state-owned oil company Saudi Aramco is building two 400,000 b/d refineries in partnership with Total and Sinopec of China. The refineries will process almost all the crude produced from Saudi Arabia's newest oilfield, known as Manifa. Second, production will be lower in Syria, Yemen and Oman.

Overall, crude oil imports by industrialised countries will decrease 4.3m b/d over the next five years. Meanwhile, developing countries will buy 2.7m b/d more overseas in 2017 than last year. But the contraction in crude trading could come alongside expanding trade in fuel as US and Middle East producers refine crude nearer to home and ship products abroad.

The merchants whose routes form the backbone of world oil trading will need to adapt, too.

BP, for example, shook up its trading arm structure two years ago in response to changes in the global oil map. At the time of the announcement, Paul Reed, chief executive of BP integrated supply and trading, told staff in an email that BP's asset base was predominantly in the mature markets and had "relatively little exposure to some" of the new growing consuming areas.

Trafigura is also adapting by making more investments in fast-growing Asia. The trading house this year announced it had invested $130m to buy a 24 per cent stake in the Nagarjuna Oil Corp Ltd planned refinery in southern India. It has also announced $120m in investments in storage tanks at the refinery's site.

Others are expanding in the US to profit from the need to transport more domestic crude. Vitol bought a 50 per cent stake in Blueknight Energy Partners, which specialises in US crude oil pipelines. The trading arm of Shell recently applied to the US government for a licence to export US domestic crude to Canada.

"As long as oil is moving throughout different regions in the world there will still be a niche for the traders," says Andy Lipow, a Houston-based consultant and former Vitol oil trader. "It's just that the direction of the flow will change."