Arbitrage flows of WTI Midland to Asia persist despite unfavorable economics

Demand for US light sweet WTI Midland crude into Asia continues to be supported for the moment by its quality premium despite unattractive arbitrage economics driven by a widening EFS spread and narrowing WTI-Brent spreads, market sources said. However, a sizeable part of this demand may in the near term move toward Middle Eastern sour crudes as Western crude grows more uncompetitive, the sources added.

The Brent-Dubai Exchange of Futures for Swaps, or EFS, spread -- an indicator of global sweet/sour crude dynamics -- widened to an over four-month high at the Asian close July 18, keeping Western arbitrage crudes unattractive to Asian buyers. Together with a strong prompt backwardation in Western crude markers, this kept demand focused on Middle Eastern sours and regional sweet crudes in the near term.

The spread widened 81 cents/b, or 50.31%, on the month to $2.42/b at the Asian close July 18, the highest since touching $2.54/b March 4, S&P Global Commodity Insights data showed.

The widening spread resulted in the contract -- a key indicator of Brent's premium over the Middle East sour crude market -- reflecting the strength in Brent-linked crudes compared with Dubai-linked grades, rendering various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark less economical compared with Dubai-linked grades.

Several Asian refiners have already been seen turning away from their traditional crude feedstock choices, or otherwise upping their term crude volumes from Middle Eastern producers for the latest allocations.

China's Rongsheng Petrochemical, for one, has opted to take Oman crude, as well as Canadian heavy sour Access Western Blend from the TMX pipeline, in its latest tender seeking October-arrival barrels. The refinery has occasionally taken West African crudes in its tender in the past when barrels there appeared to be of better value.

"Brent-Dubai structure is not helping, Oman crude is better value," a European trade source said.

This comes at a time of still relatively poor refining margins across Asia, likely prompting many end-users to actively seek out the most competitively-priced crude grades in the market.

Demand persists

Meanwhile, the crude complex also saw the narrowing of the WTI-Brent spread, further dampening arbitrage opportunities, as it makes Brent-linked alternatives relatively more attractive for end-users.

The front-month WTI-Brent spread stood at minus $3.52/b at the Asian close July 18, narrowing $1/b, or 22.12%, on the month, Commodity Insights data showed. The spread was last on the same level on Oct. 11, 2023 and higher on Oct. 10, 2023 at minus $3.43/b.

Despite unviable arbitrage economics, the market is still seeing steady inflows of WTI Midland into Asia. The latest such trade came from Taiwan's CPC, which purchased three VLCC cargoes of the grade, though further details could not be ascertained.

Prior to this, ExxonMobil had also purchased October-delivery barrels of WTI Midland from Aramco Trading at a premium in the high-$3s/b to October Dated Brent on a delivered basis, according to market sources.

"If you want to buy sweet crudes, Midland is the cheapest grade you can get your hands on, though many will be comparing Murban to Midland, with Midland having certain advantages due to certain [quality] aspects – with the [current] price delta, marginal buyers indifferent to Midland and Murban might be taking Murban because of the price, but that is not the case for everyone," the trader said.

At the Asian close July 18, Platts had assessed Murban crude at $86.17/b and WTI Midland at $87.54/b on a delivered basis to North Asia, Commodity Insights data showed.

This comes as US crude inventories fell 4.87 million barrels to 440.23 million in the week ended July 12, marking the third consecutive week of drawdowns, US Energy Information Administration data showed July 17.

The draw comes as strengthening refinery demand continued to tighten the market, placing stocks 4.5% behind their five-year average for this time of the year, opening the widest deficit since January when stocks were over 5% behind the five-year average.

"Demand in the world's biggest fuel importer appeared to be picking up with the travel-heavy summer season," Phillip Nova's Senior Market Analyst Priyanka Sachdeva said July 19.