Delivered WTI Midland crude differential to Asia flips to discount for the first time

Singapore — West Texas Intermediate Midland crude differentials of Asia-bound barrels for the first time flipped to a discount this week and continue to deepen for June delivery barrels, amid looming demand concerns as economies grapple with the coronavirus pandemic, market sources said.

June arrival WTI Midland cargoes to Asia were valued at discounts of around $3-$3.50/b to Platts Dubai by traders this week, with the S&P Global Platts assessment slipping to a discount of 46 cents/b on Monday for the first time since the assessment was launched in October 2019, and quickly sliding to a deeper discount of $3.59/b on Thursday.

The outright value of WTI Midland crude for June delivery DES Yeosu was assessed at $28.7/b on Wednesday, the lowest it has ever been since Platts launched the assessments in October 2019, before inching up on Thursday to $28.9/b, Platts data showed.

Differentials have flipped to discounts even as freight rates from the US Gulf Coast to China route have surged to $73.15/mt April 1 from $24.07/mt in early March.

Translating this to lumpsum cost, it will now cost around $20 million, including reverse lightering, to transport $38 million worth of oil in a VLCC from the USGC to China, versus a cost of $7 million to transport about $100 million worth of oil in same VLCC at the start of March.

"No one is willing to come out and buy, even if prices are low," a Singapore- based crude trading source said. "The market is very uncertain," they added.

The outright value of pipeline WTI crude in Midland, Texas, was assessed at $10.09/b Monday -- the lowest price for the grade, according to Platts data which goes back to 1986.

As prompt crude prices fall, more barrels are pushed toward storage, leading to a fall in differentials for WTI in both Midland and on the US Gulf Coast, in relation to values in the storage hub of Cushing, Oklahoma, traders have said.

In Asia, market participants noted that refiners have cut run rates in response to poor product margins, as demand has been impacted by the global spread of the coronavirus.

"Although prices are cheap, from an end-user perspective, product margins are very low so not looking to buy at the moment, said a South Korean end-user, adding that the limited spot trades seen in the market were mostly purchases by traders.

Reflecting the poor product margins, the second-month jet fuel swap crack against Dubai swap averaged at $4.89/b in March -- the lowest in 17 years, Platts data showed. The jet fuel crack was last lower in July 2003, when it averaged $4.83/b, according to the data. The second-month gasoil swap crack against Dubai swap, meanwhile, averaged at $9.22/b in March -- the lowest in more than four years, Platts data showed.

Taiwan's CPC Corp, a regular importer of WTI Midland crude, did not issue its regular monthly buy tenders in March seeking crude for June delivery, amid weak demand for oil products, two sources with knowledge of the matter said earlier this month. CPC on average purchases two to three VLCCs of US crude -- mostly WTI Midland -- each month.

Run rates at both its Dalin and Taoyuan refineries are already at reduced rates of around 70% of capacity, and will be cut further from April, possibly by another 10%, due to poor oil products demand amid the coronavirus outbreak, the sources said. It also plans to process previously bought crude cargoes during this time, sources added.

STORAGE OPTIONS

With limited demand outlets and a contango structure seen in the WTI market in both the US and Asia, traders have resorted to storing the crude instead, sources said.

According to Platts data, the M1/M2 spread for the NYMEX WTI futures contract first flipped to a contango on January 14 and has since deepened from mere cents to minus $4.03/b on March 31 -- the lowest since 2012.

In a contango market, the forward price of oil is above the prompt price, inferring weak prompt demand and growing oversupply, and encouraging storage.

This was reflected by the ample inquiries for floating storage off the US Gulf Coast, as although demand was thin, the arbitrage window to move US cargoes to Asia was wide open, shipping sources said.

In recent weeks, globally, up to 40 VLCCs and 20 Suezmaxes have already been placed on long-term chartering, according to Platts estimates, with some super tankers booked to store crude for nearly three years, potentially the longest ever duration for floating storage.

As far as land-based storage is concerned, Platts Analytics' current estimates suggest global oil storage capacity will be nearly full by May, which would leave no option but for producers to cut back on output, sources said.