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Twisted tale—The oil and gas industry is beyond bent out of shape

Twisted tale—The oil and gas industry is beyond bent out of shape

They might try their hardest to convince us but the oil barons of the world can never keep politics out of oil markets. And things can only get more convoluted.

August 2, 2011 2:16 by

Politics has long skewed oil supply lines, but this year’s confluence of events has bent the route from the well to the gas tank so far out of shape that West African oil is going to a refiner in Taiwan to make diesel for Brazilian truckers.

It is politics that has sent Siberian oil on its way to Peru in a hitherto unchartered trade route, and made it profitable for Belgian chocolatiers to run vans with Indian-processed Colombian oil.

Markets are stretching to re-allocate supplies in the wake of four major events this year: Libya’s civil war, rising Saudi output, the release of emergency oil stockpiles coordinated by the International Energy Agency and a payments dispute between India and Iran.

“Geopolitical events have triggered crazy distortions of oil flows at a global level,” said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp., who joined the company in 1987.

“The IEA release caused a secondary tsunami of unintended crude flows. In my career, I haven’t seen anything like this.”

Oil markets are withstanding the most enduring supply shock since the 2003 Iraq War, the loss of 1.3 million barrels per day (bpd) of Libyan oil exports, while absorbing the release of IEA oil. Most of the crude in the release was sold in the United States, displacing its more usual imports.

US crude imports from West Africa that would have amounted to about 19 million barrels in August have been re-routed, Reuters calculations show, virtually halting shipments of Nigerian and Angolan crude to North America.

Europe will receive as much as 40 million barrels of crude from West Africa in August, up from about 28 million in July.

West African crude flows to Asia are also increasing after a the IEA release improved arbitrage economics.

“The increasingly active involvement by consumer governments has deepened the politicisation of the oil market,” said London-based Barclays Capital oil analyst Amrita Sen.

“With the unrest in the Middle East and North Africa region this year proving to be a watershed of sorts, geopolitics is likely to play an even more important role in shaping the future of oil markets in the coming years.”

This means long-standing arbitrage strategies may be at risk and new ones are being formed, while producers, refiners and consumers must cope with growing market swings. Oil price volatility in the second quarter surged to its highest level in more than two years.

Five large cargoes of Iraqi Basra Light crude, an unaccustomed guest in Europe, are heading to the continent in a rare development triggered by the a IEA oil stocks release and a strengthening of Russian crude values.

The increase in US shale oil production feeding into the landlocked Cushing hub in Oklahoma, the inauguration of a pipeline pumping 300,000 bpd of Siberian high-quality crude into northern China and Japan’s earthquake have also been key factors in changing arbitrage flows this year.

But the most intense reshuffling involves disruption-stricken Africa and Europe, top crude stockpile holder the US, the world’s top-producers in the Middle East and the fastest-growing market in China.

Asia is key as an intermediary in the new pattern because of the

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