LONDON: Prices for international marker crude Brent have been jolted into a new pattern by booming U.S. crude output reshaping the market in its backyard Atlantic Basin market.
The indirect impact of additional U.S. supply on Brent, used to price two-thirds of oil globally, adds to the influence of the U.S. in setting global prices.
Brent crude futures are trading at a discount to the following month until January 2015 - a structure known as contango and a sign of ample supplies.
The nearby contract had been in the opposite structure, backwardation, for most of the year until July.
Two immediate factors weighing on Brent, say traders and analysts, are abating investor concern about geopolitical threats to supply that had been supporting prices and a slight increase in production from Libya in July.
But the broader background is the growing amount of light, sweet crude that used to be imported in larger volumes into the United States - such as crude from Nigeria and Algeria. U.S. crude exports to Canada are also reducing Canada's need to import crude of that quality.
"Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin, where surprisingly steep demand contraction recently compounded the effect of relentless North American supply growth," the International Energy Agency said in a report on Tuesday.
And adding to that trend, Asia is for now not buying much crude - adding to the supply looking for a home in Europe.
"It is no longer just the U.S. but increasingly now also Canada. The U.S. is sending more and more of its crude from the Gulf coast by ship to Canada with total exports currently seen at around 260,000 bpd," said Eugene Lindell, analyst at JBC Energy in Vienna.
"These volumes are displacing the usual suspects - the Atlantic Basin light, sweet crudes from the North Sea and Africa. So U.S. shale is having a big, though somewhat indirect impact on Brent."
U.S. imports of crude from Nigeria, the top exporter in Africa, declined to 84,000 barrels per day in May 2014, down from 345,000 bpd in May 2013 and from 371,000 bpd in the same month of 2012, according to U.S. government figures.
Another longer-term factor, others in the industry say, may be the growing volumes of oil products from U.S. refineries being exported into Europe - a situation helped by the relative discount of U.S. crude to Brent, as this widens U.S.refineries' profit margins.
"Refinery runs and refinery margins in Europe are being affected by U.S. imports," said Christopher Bellew, a London-based oil broker at Jefferies. "Put simply, U.S. fracked oil is displacing Brent."
The Brent forward price curve suggests the contango will be gone in early 2015 as Asia eventually whittles away at the overhang of crude.
"For the Brent contango to endure, geopolitical tension must remain muted while the surplus in light oil supply in the Atlantic Basin must persist," said BNP Paribas analyst Harry Tchilinguirian. "This may not necessarily be the case in the coming months."
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