Petroleum Industry Research Foundation Inc. (Pirinc), New York, warns it would be unwise for the U.S. or other countries to impose oil related sanctions against Nigeria as a protest against that governments policies.
Pirinc said international sanctions would push oil prices sharply higher, with a particularly severe global effect on heating oil and diesel fuel because of Nigerian crudes uniquely high distillate yield. The effect would be magnified for the U.S. Northeast because of its heavy dependence on Nigerian supply.
Nigeria produces 1.9 million b/d of low sulfur, high gravity crude. The U.S. imports 745,000 b/d.
Replacement crude
In the case of an embargo, Pirinc said, Nigerian volumes could be offset by the worlds spare productive capacity of 3.5 million b/d (two thirds in Saudi Arabia), but the replacement crude could not match the quality of Nigerian oil with its high yields of light products.
Thus the prices for all crudes would spike, with high quality (light, low sulfur) crude oils leading the upward move. Product prices in the regions that refine and consume light products such as gasoline, distillate, and diesel (Europe and the U.S.) will outpace crude oil.
As happened during Operation Desert Shield, the use of heavier, higher sulfur replacement crude oil (if available) would require higher runs to meet light product demand and result in additional, unwanted, volumes of heavy fuel oil.
Uncertainty over the availability of incremental supplies will encourage inventory holding, the phenomenon that unbalanced markets in the 1979 price run-up following the Iranian revolution.
Pirinc said even a unilateral U.S. embargo could disrupt markets for heating oil. North Sea and other substitutes for Nigerian oil have a lower distillate yield.
Thus, markets could be expected to feel the realignment as refiners rebalance the barrel. Higher runs to produce additional winter supplies of middle distillates will increase the draw on crude oil markets (upward price pressure on crude oil) and increase output of gasoline as a coproduct (downward price pressure on gasoline). Sharply higher distillate prices would be the expected balancing mechanism.
Pirinc said Nigeria accounts for 20% of oil imports and about 18% of refinery runs on the U.S. East Coast, as well as 30% of oil imported into the Virgin Islands, an important supplier of petroleum products to the U.S. Northeast.
East Coast trend
In recent years, Pirinc said, the trend in (U.S. East Coast) distillate markets has been toward greater dependence on supplies from area refineries and lower dependence on imported product. Over the 1990-94 period, furthermore, East Coast refineries carried relatively higher inventories while downstream storage ran at lower levels. Refineries accounted for 20% of peak seasonal stocks in 1990 and 30% in 1994. In 1995, lower (bulk terminal) inventories reflected the new refiner patterns.
The system, therefore, has become highly dependent on smooth output from the refinery gate. As a consequence, any disturbance in refinery operations or output will be quickly and strongly felt in product prices.
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