Asian sweet crude seen under pressure for Nov cycle on surging arbitrage flows

Differentials for mainstay Asian sweet crude grades from Malaysia and Vietnam are expected to come under pressure for the November trading cycle, because of a surge in arbitrage flows from the US and Mediterranean, and poor domestic demand, traders said Sept. 7.

Several traders warned of a rising tide of US and Mediterranean-crude cargoes set to arrive in Asia between November and December, with one of them estimating volumes from both the regions at least around 5 million barrels for November alone.

Shipping reports, meanwhile, showed a spike in US-crude cargoes booked for Asia over the week ended Sept. 3. At least four VLCCs were booked by companies -- including, US-based Phillips 66 and Occidental Petroleum, South Korea's SK Energy and trading house Vitol -- to lift crude from the US Gulf Coast in October for destinations in Asia. US to Asia fixtures, in comparison, were mostly absent for most of August for cargoes loading in September, shipping reports showed.

"A lot of arb [arbitrage] is coming, mostly from the US, as West African crudes will be absorbed by Europe," a trader said, citing Eagle Ford, WTI Midland and Mars among the grades being shipped to Asia.

A widening Brent-WTI spread has favored arbitrage economics for US-crude cargoes to Asia, with the M2 spread averaging $3.43/b in September, as of the Asian close Sept. 6, up from $2.80/b in August.

Traders pegged the differentials for the four main Malaysian crude grades, Labuan, Miri, Kikeh and Kimanis, that compete for end-users with the US' WTI Midland and Eagle Ford, as well as Mediterranean grades, such as, Azerbaijan's Azeri Light and Kazakhstan's CPC blend, at premiums in the low to mid-$2s/b to S&P Global Platts Dated Brent, FOB.

Another trader said Malaysian crude grades were likely to trade below $2/b premium to Dated Brent, FOB, in September, because of the higher arbitrage flows.

"Regionals will be under pressure as arb like US is very cheap," the second trader said. "WTI Midland is landing in Southeast Asia at $1/b premium to Dated Brent. So for regionals, I think under $2/b [premium to Dated Brent] is possible," the trader said.

Last month, Malaysian crude grades, Kimanis and Labuan, traded at premiums in the mid-$2s/b to $3/b to Platts Dated Brent, FOB, for October-loading cargoes, while Vietnamese crude grades traded in the $1s/b to low-$$2s/b premium to Dated Brent, FOB, Platts reported earlier.

Meanwhile, Asia's sweet crude producers have been offering more cargoes in September, due to weak domestic demand. Vietnam's PV Oil issued a tender offering two cargoes of Su Tu Den crude for loading in November, in the week beginning Sept. 6, up from only one cargo every one to two months, Platts reported earlier.

Sources said a September-loading cargo of Malaysia's Miri crude, held by a trading house, was still being offered in the market.