The export market has been a boon for US crude oil in early 2020, with the world, and especially Asia, looking to quench their thirst for light sweet grades.
US outflows have been strong, with cFlow, S&P Global Platts' trade flow software, estimating exports at 3.245 million b/d through the first five weeks of the year, despite worries of developing headwinds in the market.
High shipping costs in December and January, several fog-related delays and a closing arbitrage into Europe could have hampered exports, but the tides have turned in the US’ favor, with rapidly descending fright rates and new opportunities in Asia supporting seaborne volumes.
The arbitrage to purchase West Texas Intermediate out of the Magellan East Houston terminal for delivery in Rotterdam compared with Forties, a move which has been largely workable for the past year, became uneconomical in February, according to S&P Global Platts Analytics. That spread closed at minus $1.33/b last week.
That said, WTI crude bound for Asian ports has become increasingly appealing in recent weeks.
WTI MEH delivered into Singapore stood at a positive $4.70/b for the month of January compared with Malaysia’s Tapis crude, up $1.62/b compared with December and an over one-year high, according to Platts Analytics data.
American crudes for delivery into Northeast Asia appear to be more competitive than other blends, with the incentive to import WTI MEH an estimated $1.16/b compared with ESPO crude, which is more competitive than the Bonny Light, Murban and Forties grades.
Freight rates weakenOvertonnage concerns in both the VLCC and Aframax markets have driven freight lower across the board.
The US Gulf Coast export freight market has seen rates plummet in the past few weeks, falling 26% for the actively traded Aframax USGC-UK run and 40% for movements on the VLCC USGC-China route.
Freight was assessed February 6 on the Aframax 70,000 mt USGCUK Continent route at $28.53/mt, down from a $45.44/mt average in January and $64.04/mt to start the year. Rates dipped as low as $22.42/mt on January 31.
Freight for the VLCC 270,000 mt USGC-China route was assessed February 6 at lump sum $6.5 million, or $24.07/mt, down $5.3 million from the average rate in January.
Global tonnage availability has grown in the VLCC segment as the market re-establishes itself following a period of adjustment after the January 1 implementation of the International Maritime Association’s new low-sulfur fuel regulations.
Additionally, reduced Chinese demand during the Lunar New Year Holiday and the outbreak of the coronavirus have left the closely related Arabian Gulf and West African markets oversupplied. This has pushed USGC-loading freight on a downward slide, as the competition for ballasters eases.
WTI, Bakken popular across AsiaUS crude flows to Asia are expected to pick up in the coming months as an open arbitrage in January led to an increase in sales of US crude cargoes to the region.
US crude grades across the spectrum—WTI Midland, West Texas Light, Eagle Ford , Bakken, and DJ Commons—for February- and March-loading cargoes have been sold last month to end-users across Asia, traders active in the US crude arbitrage said. Those cargoes are expected to arrive at their destinations over March to May.
"The arbitrage was very [much] open in January," one trader said. "US crude has been sold to almost everyone here, from India in the South to Southeast Asia to North Asia."
While US crudes have always been priced at competitive levels to Asia, previous months saw stronger European demand and higher freight rates lessening the flow of cargoes, US crude traders said.
But with VLCC freight rates now at nearly half the levels seen in end-December, traders have grabbed the opportunity to sell more cargoes to Asia.
Taiwan's CPC was heard last month to have bought one VLCC of US flagship export grade WTI Midland crude for April arrival from a Western trader, at a premium of around $4.90/b to Platts Dated Brent, DES Taiwan, down $1/b from the levels it paid in December for March-arrival cargoes.
Traders said the latest offers for WTI Midland to Northeast Asia have likely come off even further since CPC's deal.
Shipping reports in the last two weeks have correspondingly showed a spike in US crude fixtures to Asia.
BP has the VLCC Bunga Kasturi Tiga booked on the US Gulf Coast-to-East route for an end-February loading cargo, while Chevron has the VLCC Agios Nikolas booked on the same route for an early-March loading cargo, reports showed.
US crude trader Trafigura also has two VLCCs for March-loading crude booked for Eastern destinations.
Equinor, Phillips 66, Vitol and Occidental Petroleum are among other companies that have also booked VLCCs for cargoes loading in February or March to Asia.
February-loading US crude cargoes heading to Asia could be close to 30 million barrels, up from around 17 million barrels in January, according to shipping reports and cFlow.
China lowers tariffsChina’s move to cut its tariffs on US crude in half to 2.5% starting February 14 could also incentivize more flows of US crude into Asia.
China was Asia’s biggest customer of US crude in 2018, but it surrendered the top spot to South Korea last year amid an escalating trade dispute with Washington.
China imported 127,000 b/d, or around 46.36 million barrels, of US crude in 2019, down 48.3% from 2018, according to General Administration of Customs data. South Korea imported 137.89 million barrels of US crude last year, data from state-run Korea National Oil Corp. showed.
By Andrew Toh, Kristian Tialios, Catherine Wood and Felix Clevenger