Since the 1970s, Nigeria has sent a steady stream of high-quality crude oil to North American refineries. As recently as 2010, tankers delivered a million barrels a day.
Then came the U.S. energy boom. By July of this year, oil imports from Nigeria had fallen to zero.
Displaced by surging U.S. oil production, millions of barrels of Nigerian crude now head to India, Indonesia and China. But Middle Eastern nations are trying to entice the same buyers. This has set up a battle for market share that could reshape the Organization of the Petroleum Exporting Countries and fundamentally change the global market for oil.
The sudden plunge in global crude oil prices from over $100 a barrel to under $65 has been portrayed as a showdown between Saudi Arabia and the U.S., two of the world’s biggest oil producers. But the reality is more complex, involving Libyan rebels and Indonesian cabdrivers as well as Texas roughnecks and Middle Eastern oil ministers. It reflects both the surging supply of crude and the crumbling demand for oil.
And the oil-price free fall may not end soon. Bank of America Merrill Lynch says U.S. oil prices, which closed below $60 a barrel Thursday for the first time in years, could drop to $50 in 2015
For a long time, it seemed like the world’s growing appetite for oil would soak up all the displaced crude. By 2011 prices began to hover between $90 and $100 a barrel and mostly stayed in that range.
But earlier this year, another trend began to come into focus, catching Wall Street energy analysts and other market watchers by surprise. In March, many analysts predicted global demand for crude oil would grow by 1.4 million barrels a day in 2014, to 92.7 million barrels a day.
That prediction proved wildly optimistic.
Rising supply and falling demand both put downward pressure on prices. Throughout the summer, however, fears of violence in Iraq kept oil prices high. Traders worried Islamic State fighters could cut Iraq’s oil output.
Then two events tipped the market. In late June, The Wall Street Journal reported the U.S. government had given permission for the first exports of U.S. oil in a generation. While the ruling was limited in scope, the market saw it as the first crack in a long-standing ban on crude exports. Not only was the U.S. importing fewer barrels of oil, it could soon begin exporting some also. This news jolted oil markets; prices began to edge down from their summer peaks.
On July 1, Libyan rebels agreed to open Es Sider and Ras Lanuf, two key oil export terminals that had been closed for a year. Libyan oil cargoes sailed across the Mediterranean Sea into Europe. Already displaced from the U.S. Gulf Coast and eastern Canada, Nigerian oil was soon replaced in Europe, too.
Increasingly, shipments of Nigerian crude headed toward China.
Saudi Arabia didn’t want Nigeria to develop long-term relationships with refinery buyers in Asia. In late September, the kingdom decided to shore up its hold on them by, effectively, holding a sale. The Saudis cut their official crude price in Asia by $1 a barrel; within a week, Iran and Kuwait did the same.
Two weeks later, the IEA again lowered its full-year projection of demand growth by 200,000 barrels a day to a meager annual increase of 700,000 barrels, nearly half of what it expected at the beginning of the year. Oil prices fell nearly $4 a barrel on the news.
At this point, the oil market appeared to be in free fall. Of the 23 trading days in October, the price of crude fell by more than $1 on eight days. It rose by $1 on one day.
Traders’ attention turned to OPEC, which has traditionally played the role of market stabilizer by cutting production when prices fall and raising production was prices rise. Many OPEC members, reliant on the cash oil brings in to pay for generous social programs, didn’t want to cut.
Saudi Arabia’s powerful oil minister, Ali al-Naimi, was silent for weeks. The country had been burned in the past when it cut its oil output, only to see other countries continue to pump—and steal its customers.
And it was already feeling competition, says Abudi Zein, chief operating officer of ClipperData, a New York firm that tracks global crude movement. Colombia, which historically has sent most of its oil to the U.S., is finding its biggest buyer this year is China, a critical market for OPEC, he said.
“For the Saudis, Asia is their growth market,” Mr. Zein says. “The Nigerians and Colombians are being kicked out of their natural markets in North America. Saudi had to do something.”
At its regular meeting in Vienna in late November, the cartel kept production unchanged. U.S. and European oil prices fell another $7 per barrel.
On Wednesday, Mr. al-Naimi, the Saudi Arabian oil minister, was asked whether OPEC would soon act to cut exports. “Why should we cut production?” he asked. “Why?”