Americas Aframax freight spikes nearly 68% amid shift in weakening WTI arb environment

A bullish Americas Aframax market, which has seen freight for trans-Atlantic voyages out of the US Gulf Coast climb 67.7% since Sept. 29, is adding fuel to the fire of an already weakening arbitrage for WTI exports to the European market.

Freight for the benchmark 70,000 mt USGC-UK Continent route was last assessed Oct. 13 at Worldscale 130, or $22.15/mt, up w20 or $3.41/mt from Oct. 12. At least four fixtures were heard for USGC-UKC/Mediterranean runs, while two cargoes for the voyage remained outstanding by the end of the Oct. 13 Platts Market on Close assessment process.

Market participants have attributed the previously favorable arbitrage and overall increased demand heading into the fourth quarter as a drain on the number of ships positioned in the region, with a shipbroker report showing only four Aframaxes able to make prompt loading windows in the USGC Oct. 13.

The Brent-WTI spread, which acts as an indicator for the competitiveness of US-origin crudes in the global export market, dipped below $3/b Oct. 11, last seen Oct. 13 at $2.64/b at the end of the Americas Platts MOC.

Charterers have started looking to larger-tonnaged ships for relief from the freight spike, with Mercuria and PetroChina seen with Suezmax cargoes. Market participants were unsure how long the Suezmax market could keep a cap on the Aframax market amid rising midsize tanker rates. The 145,000 mt USGC-UKC run was last assessed Oct.13 at w62.5 or $10.37/mt.

BP even ventured into the VLCC segment, which typically undergoes long-haul voyages to Asia and has gradually increased since early September only to see incremental declines starting Oct. 7. BP was said to have placed the Red Nova on subjects for a Nov. 5-10, 270,000 mt USGC-UKC run at a lump sum $2.475 million.

At current levels, Aframaxes are trading at $8.37/mt above Suezmaxes making the same trans-Atlantic voyage, while VLCCs are $1.20/mt less expensive than Suezmaxes.

Active charterer interest in upcoast voyages has also lent support to rates, with the 70,000 mt East Coast Mexico-USGC run jumping 81.8% over a week ago Oct. 5 amid a flurry of at least 11 ships being placed on subjects since the spike occurred.

Market participants expect the uptick to ease in the near term as ships open up from short-haul ECMex-upcoast runs, which typically take upward of three days, and as WTI exports potentially wane on a weakening arb.

"I think this cycle is going to mirror 30 days ago," a shipbroker said. "The Suezmax ceiling is going to move up, the arbitrage has appeared to have closed in the last three days, and the Brent-WTI spread is sub $3/b."

USGC crude weakens amid shift

While the Brent/WTI spread has indeed narrowed in recent days, a move that is considered to make US crude exports less competitive in relation to their Brent-based counterparts, most US crude grades on the US Gulf Coast have weakened in response to the changing spread, blunting some of the tighter spread's impact. WTI at the Magellan East Houston terminal was assessed at a 75-cent premium to cash WTI Oct. 13, down 80 cents from a recent high Oct. 7. Similarly, this adjustment has been heard for FOB cargo offer levels. A November-loading cargo was heard offered at about a $1 discount to January ICE Brent Oct. 12, down from previous levels of just a 60-cent discount.

Export values to Europe have remained strong in recent weeks, with cFlow, Platts trade flow software, estimating US crude exports to Europe at 1.282 million b/d over the last five weeks, but it remains to be seen if flows could come under pressure amid the uptick on freight.

European impact not yet seen

European crude traders so far have not seen a significant impact of the surge in freight on delivered offer levels for WTI Midland into the region.

"Freight is expensive, yes, but end November [arrivals of WTI Midland into Europe are] still landing at around [a] 30-cent ... [premium to November Dated]," one Europe-based trader said.

WTI Midland arrivals and competitive offer levels have been keeping a cap on differentials of European light sweet crudes. Market participants will be keeping an eye on offer levels for the US grade to see if the increased freight costs do filter through and, in turn, relieve some pressure from the local European light sweet grades.

"US [demand] seems to be looking better so we wait to see [the] the effect on WTI Midland exports with that and higher freight," a second Europe-based trader said.