In the LOOP: US crude exports to Europe driven higher by spreads, tanker rates

Favorable freight economics have helped drive up demand for light, sweet US crude oil in Europe and an expanding list of countries, including Germany, are looking to import barrels from the US Gulf Coast.

USGC-to-Europe crude flows have been on the rise recently, with some market participants expecting up to 800,000 b/d to land in Europe in March. At least 5.2 million barrels (roughly 740,000 b/d) of crude was sent from the US to Northwest Europe and Mediterranean during the week ending January 11, according to S&P Global Analytics data.

In October, the latest month for which data is available, an average 580,000 b/d of US crude was sent to Northwest Europe and the Mediterranean, according to the Energy Information Administration. Rotterdam is the main destination for US oil in Europe and an average of 1.7 million barrels a week has flowed into the Netherlands from the US during the past six weeks. The UK is also a major destination, averaging about 1 million barrels a week during the past six weeks. There has been a noticeable increase in flows to Italy, with about 1.5 million barrels arriving there for the week ending January 11. That is about triple the amount what was sent in the weeks prior.

While crude netbacks have not been a particular driving force to move more US crude to Europe, price spreads have. Prices of Forties in Europe and delivered WTI have been at or near parity on a delivered basis from October to the present. When the two are at parity it does not present any hurdles to the arb.  However, the arbitrage to move US crude to the Mediterranean has likely been incentivized by increased discounts compared to competing grades. WTI delivered to the Med averaged a near $2/b discount to Azeri Light over a similar period, and a near $3/b discount to Nigerian Bonny Light, according to S&P Global calculations.

The Netherlands and Italy are not the only countries bringing over more US crude. In a rare move, two cargoes of US crude recently were sent to Germany. The Southport, an Aframax-sized tanker, loaded 540,000 barrels of US crude in Ingleside, Texas, on January 6 and is headed to the German port of Wilhelmshaven. Another Aframax, Searanger loaded in Houston last month and made the trip to Germany, arriving in Brunsbuttel on December 24. It is unclear which refiner was the buyer of the US crude in Germany as both ports are large storage points and are connected to pipelines that may transport oil to other European countries, sources said.

While smaller tankers typically carry US crude to Europe, over the past two weeks, there has been an increase in the number of larger VLCCs and Suezmaxes on the USGC-UK Continent or Mediterranean route as charterers looked to the larger ship classes to carry crude cargoes to Europe. European refiners typically prefer the 500,000 barrels carried on Aframax vessels in comparison to the 1 million barrels on Suezmaxes and 2 million on VLCCs. But recent rate economics have made VLCCs nearly half of the cost per metric ton of taking an Aframax.

There have been at least six Suezmaxes and four VLCCS placed on subjects to carry crude from the US to Europe since the market returned from the long holiday weekend on January 2, compared to eight Aframaxes. No VLCC had carried a US cargo to Europe until the Olympic Lady set sail from Corpus Christi Lightering, heading to Rotterdam with an Occidental Petroleum cargo December 24. Most recently, Oxy booked the Hong Kong Spirit to make a 270,000 mt USGC-Singapore run at a lump sum $6.15m with options to China at $7.15m and the UK Continent at $4.0 million.

There is expected to be a shift back to Aframax vessels as rates have fallen Worldscale 47.75 points, or $8.73/mt, since January 2, last assessed Monday at w115, or $21.05/mt. The arbitrage opportunity for US crude shipments, taking into account Aframax freight rates, has opened up following the drop, sitting at 72 cents/b for exporting WTI crude into Northwest Europe and $1.05/b for Eagle Ford.

British oil giant BP continued to show bids for US crude oil during the London Market on Close process on Monday, but no trades were heard done. BP had also made several bids for WTI Midland delivered to Europe last week. The standing bid on Monday was for 650,000 barrels to be delivered DAP basis Rotterdam between March 9-13, and was pricing flat to Dated Brent. BP also placed a bid for Eagle Ford 45 API crude. WTI Midland barrels expected in the Mediterranean in March were talked late last week in London at Dated Brent plus between 20-50 cents/b, depending on delivery dates.