Nigeria, Libya oil swamping global market with light oil may help price of Alberta heavy crudes

Mexican, Venezuelan heavy crudes output declining

OPEC’s struggles to rebalance global oil markets may – a well qualified may, though, – have an upside for Canadian heavy crudes, most of which are produced in Alberta from the oil sands.

Nigeria and Libya, which are exempt from a OPEC global production-cutting deal, are swamping the Atlantic Basin with sweet light crude oil.

According to Reuters, Nigeria alone has over 60 million barrels of unsold crude and Libya has tripled its production over last year’s output.

“They’ve added 600,000 barrels per day between the two of them” since the original deal was struck, Amrita Sen of consultancy Energy Aspects, told Reuters. “And that’s half the OPEC cuts.”

The sudden boost in the African nations’ production could scuttle OPEC’s plans to increase oil prices mired in a three-year long slump.

“The biggest issue is light, sweet crude,” Sen said, adding the Atlantic Basin is “awash” with it. “This is where OPEC isn’t light enough on its feet … the benchmarks are all light sweet. And the cuts are medium and sour.”

According to Kevin Birn, leader of the IHS Energy Oil Sands Dialogue, those cuts to production of heavier grades may create some upside for oil sands producers.

“It would likely help Canadian heavy relative to light, tighten the differential,” he said in an email.

“OPEC curtailment helps all producers not in OPEC as they pull back supply they help support oil prices globally, but also conversely benefit all those producers who will only continue to produce and in some instance may encourage greater supply like in the US.”

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Light and heavy crude oils are close substitutes, but not perfect substitutes, explains energy economist Kent Fellows. Price changes in lighter crudes can translate into price changes for heavy crudes, but not necessarily at a one-for-one rate.

“Over the short run it is hard to know what is driving what when comparing price fluctuations of different quality crude oils,” the University of Calgary associate professor said in an email.

“A glut of light sweet crude would be expected to have a negative effect on the price of Alberta heavies, but the initial OPEC cuts on heavy and sour crude would be expected to have a positive effect on the price of Alberta heavies. We also have to consider regional differences since oil markets have both quality and geographical dimensions.”

Birn says that if OPEC cuts heavy production, the reduced volumes will occur while Mexican and Venezuelan heavy crude – Canada’s biggest competitors in the Gulf Coast – volumes continue to decline, which may help strengthen heavy pricing relative to light crudes.