Narrow Brent-Dubai price spread stokes Asia's light sweet US crude interest in Q2

Multiple Asian crude importers are aiming to make the most of the narrowing Brent-Dubai price spread to take ample US crude cargoes in the second quarter, as light sweet North American grades priced against the European benchmark in the Asia-Pacific market appear more attractive than some Middle Eastern sour crude grades.

With the spread between the European benchmark Brent and the Asia-Middle East marker Dubai hovering around 2-year lows, several refiners across Northeast and Southeast Asia have started to notice arbitrage economics for light sweet North American barrels improve significantly since late Q1, traders and refinery feedstock managers based in Singapore, Seoul, Hong Kong and Bangkok said.

East Asia's biggest US crude customer South Korea has been importing around 5-6 VLCCs/month, or around 10 million-12 million barrels/month, over the past year, but feedstock managers at the country's major refiners said competition for US crude has increased among multiple regional buyers including Taiwan, Thailand and China in recent trading cycles.

Reflecting the recent increase in competition, South Korea's crude imports from the US, mostly light sweet grades including WTI Midland and Eagle Ford, fell 27.7% year on year to 8.49 million barrels in April, marking the fifth consecutive month of year-on-year decline, latest data from Korea Customs Service showed.

The benchmark Brent-Dubai price spread has narrowed sharply in recent trading cycles, while many East Asian refiners consider recent Middle Eastern sour crude official selling prices somewhat expensive, making light sweet US grades that typically trade on a Dated Brent basis in the Asian market highly attractive, traders and refinery feedstock managers in Seoul and Singapore said.

The Brent/Dubai Exchange of Futures for Swaps or EFS spread, a key indicator of Brent's premium to the Middle Eastern benchmark, has averaged $1.91/b to date in Q2, narrower than $3.40/b in Q1 and $6.80/b in Q4 2022. The EFS is on course to set the lowest quarterly average since $1.85/b in Q1 2021, S&P Global Commodity Insights data showed.

A weaker EFS makes various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark more economical compared with Dubai-linked grades.

US crude to Taiwan, Thailand

In an effort to take full advantage of the narrow Brent-Dubai price spread and attractive US-Asia arbitrage trading economics, Thailand would like to take up to 2 VLCCs/month, or around 4 million barrels/month, of US crude if possible, a feedstock management source at a state-run Thai refiner said.

Thailand started to ramp up US crude imports in late Q1, receiving 63,334 b/d in March, more than doubling from 29,443 b/d a year earlier, customs data showed.

Major Taiwanese refiners including CPC and Formosa declined to comment on their US crude import targets for the next few trading cycles, but sweet crude traders in Singapore with close knowledge of North America-Asia spot trades and refinery sources in South Korea indicated that Taiwan appears to be aiming for as much as 10 million barrels/month for Q2 and Q3 deliveries.

The US overtook Saudi Arabia as Taiwan's top crude supplier in March at 8.82 million barrels, up 56.2% month on month and up 62.6% year on year, latest data from the Ministry of Economic Affairs' Bureau of Energy showed.

CPC paid a premium of around $2.50/b to Platts Dated Brent assessments for some of its May delivery WTI Midland crude cargoes, market sources with knowledge of the spot deals said. The Taiwanese refiner recently purchased 2 million barrels of the US crude for August delivery at around Dated Brent plus $2.20/b, and 1 million barrels at Dated Brent plus high $1s/b, CFR Taiwan, market sources said.

However, there is a limit to how much the willing Asian buyers would be able to take, as the US has strong commitment to supply crude oil to European refiners due to the sanctions against Russian oil, according to sweet crude traders in Singapore and refinery feedstock managers in Bangkok and Seoul.

Short burst of Chinese interest

China is expected to overtake South Korea as East Asia's biggest US crude customer over May-June as refiners and traders aggressively ramp up purchases of both low and high sulfur US grades while they cut back on term Middle Eastern crude intake for June amid higher-than-expected Persian Gulf official selling prices.

Crude deliveries from the USGC to China have been rising since March, when the volume surged 65% on the month to 321,000 b/d, according to shipping data provider Kpler. The inflows in May are predicted to double March levels to reach 664,000 b/d, before hitting an all-time high of 920,000 b/d in June, S&P Global reported previously.

However, as arbitrage economics for US medium sour Mars Blend crude appear less attractive than the margins for light sweet grades like WTI Midland, US-China crude flows may fade quickly from Q3, trading participants said.

"The CFR price of Mars for June delivery was at Platts Dubai plus $4/b, losing its competitive [edge] against [Saudi] Arab Medium, which has less chlorine content," a trading source at China's state-run Sinopec said.