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US crude traders grapple with rare closed Asian arbitrage amid demand slump


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Singapore — Falling differentials for regional crude grades amid the coronavirus outbreak and rising domestic prices in the US have made regional crudes cheaper than US cargoes for buyers in North Asia in February and, in an unusual move, closed the US crude arbitrage window to Asia, market sources said Wednesday.

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A heavy inflow of US crude cargoes into Asia was booked in early January for arrival over March-May as traders rushed to sell cargoes amid a slump in freight rates, but this trade has all but dried up in February as the coronavirus outbreak weighs on demand and regional crude prices, sources said.

Russia's Sakhalin Blend crude has sold in February at premiums of around $1/b to Platts Dubai on a CFR North Asia basis for May delivery cargoes, down from premiums in the $4s-$5s/b to Platts Dubai, CFR North Asia, for April-delivery cargoes last month.

Fellow Russian grade Sokol crude has traded at premiums in the range of $3.25-$4/b to Platts Dubai on a CFR North Asia basis for April-loading cargoes, down sharply from premiums of $7-$8.50/b to Platt Dubai, CFR North Asia, for March-loading cargoes in January.

In contrast, West Texas Intermediate or WTI Midland crude cargoes for May delivery to North Asia were valued by US crude traders this week at premiums in the $4s/b to Platts Dubai on a CFR basis. In previous months, it had traded at discounts of up to $4/b to Sokol crude, S&P Global Platts historical trade data showed.

Both Sokol and Sakhalin compete with light, sweet US grades such as WTI Midland for the same group of buyers in Asia. South Korea and Japan are among the top buyers of the Russian grades in Asia, while South Korea is also one of the largest buyers of US crude in the region.

The UAE's light, sour Murban crude, typically considered an ideal alternative to WTI Midland crude for Asian end-users, has also fallen into a rare discount to WTI Midland in February.

WTI Midland on a DES Yeosu basis has averaged at a premium of $1.27/b to Murban on a CFR North Asia basis in February to date, compared with an average discount of 37 cents/b in January and an average discount of $1.04/b in December, Platts data showed.

Underscoring the extent of the demand slowdown in Asia, the Dubai cash-futures spread -- a barometer of sentiment in the Asian and Middle East crude market -- sank to a two-year low of minus 46 cents/b on February 21, Platts data showed. The spread was most recently assessed at minus 33 cents/b Tuesday.

Shipping reports in recent days have correspondingly showed a slowdown in cargoes fixed for Asia from the US Gulf Coast for May-June, following heavy bookings seen earlier for February and March cargoes, while bookings for April-arrival US cargoes to Europe have surged.

"US domestic prices are high now because US demand is strong; it's not so much a function of freight this month," one US crude trader said.


Domestic prices for US crudes have climbed as new pipelines transporting oil from the Permian Basin, the country's most prolific shale field, to ports on the US Gulf Coast come online.

Differentials for front-month WTI Midland flipped from a four-month low to an almost five-year high in 10 days last week due to linefill demand for two new pipelines -- the 900,000 b/d Gray Oak and 600,000 b/d EPIC -- that move crude from the Permian Basin to Corpus Christi in Texas.

WTI crude at Midland, Texas was assessed last Friday at a $1.65/b premium to cash WTI, the strongest assessment for the grade since September 9, 2015, when the grade was assessed at a $1.85/b premium, according to Platts data. It remained at a premium of $1.60/b to Cash WTI on Tuesday.

The two pipelines started up late last year, though the final sections of the pipelines are still being put in place.