Nigerian Barrels and the Demand Shock: Differentials and Changing Oil Trade Flows

While most of the recent analysis has focused on the impact of supply and demand shocks on futures prices, the impact of these shocks on the shift in oil trade flows and on the dynamics of physical differentials has received much less attention. This is despite the fact that physical differentials provide valuable information about oil market conditions and about key shifts in its dynamics. In the complex web of differentials and shifts in trade flows Nigerian crudes play an important role as the swing barrels both to the east and the west of the Atlantic basin. Nigerian grades also have many features, particularly their tradability on a spot basis, which make them a bellwether of changes in market fundamentals. The predominance of spot trading is rewarding in tight market conditions as traders compete to bid up the quality differentials. But in the face of an adverse demand shock, Nigerian cargoes are the first to be distressed (i.e. the cargoes remained unsold) with unsold barrels ending up in over-ground storage both on-land and floating storage. In this Comment, we discuss some of the key characteristics of Nigerian crudes, then explain the market adjustment mechanisms in physical differentials, Dated Brent relative to futures, the spread between Dubai and Brent, and freight rates that allow the clearance of Nigerian barrels in an over-supplied market, and how understanding these mechanisms could prove useful in assessing the strength of the current recovery.

By: Bassam Fattouh

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