US crude flows to Asia over Mar-May to rise amid open arbitrage

Singapore — US crude flows to Asia are expected to pick up in the coming months as an open arbitrage in January led to an increase in sales of US crude cargoes to the region, though traders said Tuesday that the recent volatility in margins and geopolitical developments has temporarily closed off the arbitrage.

US crude grades across the spectrum - WTI Midland, West Texas Light, Eagle Ford crude, Bakken, and DJ Commons crude - for February and March-loading cargoes have been sold last month to various end-users across Asia, traders active in the US crude arbitrage said.

Those cargoes are expected to arrive at their destinations over March to May.

"The arbitrage was very [much] open in January. US crude has been sold to almost everyone here - from India in the South to Southeast Asia to North Asia," one trader said, referring to barrels loading from the US Gulf Coast this month and the next.

While US crudes previously have always been priced at competitive levels to Asia, previous months have seen stronger European demand exerting a greater pull, lessening the flow of cargoes coming to this region, US crude traders said. Higher freight rate was also another reason, they added.

But with VLCC freight rates now at nearly half the levels they were at in end-December 2019, traders have grabbed at the opportunity to sell more cargoes to the region.

Most recently, Taiwan's CPC was heard to have bought last month one VLCC of the US' flagship export grade WTI Midland crude for April-arrival from a Western trader at a premium of around $4.90/b to Platts Dated Brent, DES Taiwan, down $1/b from the levels it paid in December for March-arrival cargoes.

Shipping reports in the last two weeks have correspondingly showed a spike in US crude fixtures to Asia.

BP, for one, has the VLCC Bunga Kasturi Tiga booked on the US Gulf Coast to East route for an end-February loading cargo, while Chevron has the VLCC Agios Nikolas booked on the same route for an early-March loading cargo, the reports showed.

US crude trader Trafigura also has two VLCCs for March-loading crude booked for Eastern destinations.

Equinor, Phillips 66, Vitol and Occidental Petroleum are among the other companies that have also booked VLCCs for cargoes loading in February or March to be sent to Asia.

February-loading US crude cargoes heading to Asia could be close to 30 million barrels, as compared to around 17 million barrels for January-loading cargoes to Asia, according to shipping reports and S&P Global Platts vessel tracking software cFlow.

Traders said latest offers for WTI Midland to Northeast Asia have likely come off even further since CPC's deal.

S&P Global Platts assessed VLCC rates on the US Gulf Coast to China route at lumpsum $7.8 million as of February 3, down from $12.8 million at the end of December.

DUBAI STRUCTURE COLLAPSE

Nonetheless, a weakening in demand for Middle Eastern alternatives - primarily the UAE's light, sour Murban crude - as falling margins cut into end-user appetite has meant that the latter grade was now more competitively priced than WTI Midland, traders said.

While the April trading cycle was still in early days, market sources pointed to the collapsing Dubai crude structure as evidence of weakening demand in Asia, particularly as the region heads into peak turnaround season.

The M1 Dubai cash-futures spread plummeted $1.04/b day on day to 88 cents/b on Monday, a low not seen since July 3, 2019 when it was at 71.5 cents/b.

Traders also alluded to the worsening coronavirus situation slashing demand for transportation fuels, with margins for jet fuel and gasoil hovering at lows not seen since February 2010 and June 2017 respectively.

As of Monday, the M2 Singapore jet fuel crack spread against Dubai crude was assessed by Platts at $8.81/b, while the M2 Singapore gasoil crack spread was assessed at $11.06/b.

"Still a few days more before the April cycle starts. Let's see how it evolves," one trader said.