OPEC Challenges Shale Afresh as Iraq Crude Floods Gulf of Mexico

(Bloomberg) -- OPEC’s latest challenge to U.S. shale oil producers would be about two miles long, lined end to end, and weigh almost 3 million metric tons. It’s due to reach American ports this month.

Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November, ship-tracking and charters compiled by Bloomberg show. Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures.

The cargoes show how competition for sales among members of the Organization of Petroleum Exporting Countries is spilling out into global markets, intensifying competition with U.S. producers whose own output has retreated since summer. For tanker owners, it means rates for their ships are headed for the best quarter in seven years, fueled partly by the surge in one of the industry’s longest trade routes.

"In the longer term, we expect the U.S. to have to increase imports next year by some 500,000 barrels to 800,000 barrels a day year on year," Steve Sawyer, the head of refining at FGE, a consultant in London. "Given our projections for Iraqi output, it could well come from here."

Hunting for Buyers

Iraq, pumping the most since at least 1962 amid competition among OPEC nations to find buyers, is discounting prices to woo customers. The U.S. may increasingly become one of them after its own output dropped by as much as 500,000 barrels a day since June. An increase in trade between the two would boost tanker owners. Deliveries take at least 57 percent longer than for those to Asia, the most popular destination.

The tanker industry’s biggest ships earned an average of almost $76,500 a day so far in the fourth quarter, which would be the highest since mid-2008 if maintained through year-end, according to data from Clarkson Plc, the world’s biggest shipbroker.

Shipowners have already seen the benefit of higher rates thanks in part to the longer-distance cargoes. Shares of Oslo-listed Frontline Ltd., led by billionaire John Fredriksen, rose 61 percent to $28.60 from the 2015 low in August. Euronav NV is up 25 percent from the year's low in February.

Gulf of Mexico

The ships bringing the 19 million barrels include vessels that left Iraq’s Basra Oil Terminal and are currently signaling U.S. ports as their destination. There is also one vessel that went through Egypt's Suez Canal and identified by shipbrokers as going to the U.S. All except one are very large crude carriers, the industry's biggest vessels, sailing to terminals in the Gulf of Mexico.

The U.S. is pumping 450,000 barrels a day less crude than during the peak in June. If all that oil were replaced by supplies from Iraq, it would require about seven supertankers each month.

Iraq is among the least expensive places in the world to extract crude. Capital costs are about seven times cheaper than for light, tight oil suppliers in the U.S. when measured by fields' daily plateau capacity, according to the International Energy Agency in Paris.

West Texas Intermediate, the U.S. benchmark, fell 43 cents to $43.78 a barrel on the New York Mercantile Exchange at 12:12 p.m. Singapore time Wednesday. Brent, the global marker, lost 19 cents to $47.25.

The Middle East country sells its crude at premiums or discounts to global benchmarks, competing for buyers with suppliers such as Saudi Arabia, the world's biggest exporter. Iraq sold its Heavy grade at a discount of $5.85 a barrel to the appropriate benchmark for November, the biggest discount since it split the grade from Iraqi Light in May. Saudi Arabia sold at $1.25 below benchmark for November, cutting by a further 20 cents in December.

"It's being priced much more aggressively," said Dominic Haywood, an oil analyst at Energy Aspects Ltd. in London. "It's being discounted so U.S. Gulf Coast refiners are more incentivized to take it."

--With assistance from Bill Lehane and Julian Lee in London

To contact the reporter on this story: Naomi Christie in London at nchristie5@bloomberg.net. To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net Dan Stets.

Copyright 2016 Bloomberg News.


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ANTHONY Bellard sr. | Nov. 13, 2015
Can you imagine being in the oilfield fixing to loose your job,and here is the kicker, My son gave his life for his country in IRAQ just to have your own government slap you further down the barrel of resentment by doing this.

Scott S | Nov. 12, 2015
So much for energy independence Our genius president wont let us export it but he will sure let us import it. I think the way his small mind sees it is; All of the people that lose their jobs in the oil & gas industry in america can always get a good Government job......lol....

John | Nov. 12, 2015
Marion Fortin......what an excellent idea, building refineries in the north, except that the stupid environmentalists in the north wouldnt allow it, and the refined products would still need to be piped to users all over the country, which may pose another problem.

Michelle LeBoeuf | Nov. 11, 2015
I agree. I think we should only use American Oil & tax Midfle Easten OPEC Oil. I live in Louisiana and we are losing lots of tax related revenue do to the oil price decline. It is seen in the lower sales taxes being collected due to the fact that the good paying jobs are being lost and salaries and hours are being cut and people are only buying what they need. Our education and health care budgets are also being cut because they are funded with state Oil Reveue related funds.

Lew Weingarth | Nov. 11, 2015
This is why I agree that Fredriksen is one of the smartest businessmen operating today. HIs tankers make a huge profit if oil prices drop and his SeaDrill makes a huge profit if oil prices climb. With oil prices mid range, both companies make moderate profits. Smart man, he has basically bet on every color on the roulette wheel.

exlonghorn | Nov. 11, 2015
Charles Reynolds - Labor costs in the middle east are a fraction of the costs in the U.S. Middle East oil doesnt require the expensive deep directional drilling and fracking that is required to produce from shale in the U.S. The U.S. has substantially higher and more expensive regulations (environmental, labor, etc.). At present, the majority of Iraqi oil production comes from just three giant fields making it easier and cheaper to manage and produce. The Ministry of Oil has central control over oil and gas production and development. Its a government...they really dont need to make a profit, or they can make a small profit and be happy. There are plenty of reasons they can be halfway around the world and produce at a lower cost per barrel than the U.S.

CLINT VALENTINE | Nov. 11, 2015
This is the real reason the oil supply glut in the US. We have been importing oil while drilling and production has been declining. Let's support other countries while our industry and economy suffer. It won't be until mid 2016 when all the tax dollars that come from the American oil industry don't show up that most people will realize the effect.

jim | Nov. 11, 2015
We park a 6 billion dollar carrier fleet in the middle east keeping the seaways open and dont charge them a bit for the service yet we allow them to undercut our own domestic producers. Saudi Arabia has stated its intent to put US shale out of business....We simply put are the dumbest country on the face of the earth.

Marion Fortin | Nov. 11, 2015
I agree with you! We are painting ourselves in a corner again. As production in the Bakkan winds down, inports from Middle East increases we will be in for market swings in the future due to adverse affects from world politics. Stopping the Excell keystone pipeline due to greenhouse gasses does not hold water as tankers will emit green house gasses to move the crude around the world. Again if the goverment would let market forces act the tar sand production would decrease due to lower crude oil prices. The cost to extract the oil sand would not be viable. Pipelingin oil to the southern US would be more efficient or maybe we should be building new refineries in the northern US that are cleaner than the older ones in the south?

Charles Reynolds | Nov. 11, 2015
How can oil that cost more at the well head and has to be shipped literally half way around the world be more cost effective than oil piped from west Texas? Something does not add up. I really do not want the government to get involved but what would happen if we put a temporary embargo on this oil from the middle east? What would happen if one strategically placed bomb went off? There is something not right here and we are not getting the complete story. Who exactly is importing oil if we have a glut in Cushing? This stinks.

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