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Analysis: China makes first-ever US SPR crude oil purchase

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PetroChina pays highest price among all winners

Final destination of the crude not yet decided

Analyst calls it a profile-building exercise


PetroChina International has bought crude oil from the US Strategic Petroleum Reserve -- the first such purchase by a Chinese company -- in a move that further underscores growing Chinese interest in US crude.

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PetroChina International, the overseas trading arm of state-owned oil giant PetroChina, bought 550,000 barrels from the SPR in the US Department of Energy's latest sale for a total of $28.8 million ($52.36/b).

A Beijing-based senior crude trader with PetroChina International Tuesday said that the deal, announced last week by the US Department of Energy, was not yet completed and they have not decided whether to bring the barrels back to China or send them elsewhere as the volume is small. PetroChina's Houston office would not comment.

"We notice that more and more crude barrels from North America are flowing into China, but we have not decided whether to send this cargo back," he said, declining to comment further.

Deliveries of the crude, both by pipeline and vessel, are expected to take place in May and June, but there may be some early deliveries in April, the US DOE said Friday.

The volume and price of the deal prompted a Shanghai-based analyst to call it a profile-building exercise by PetroChina.

"It will be a milestone and a good headline for a Chinese company to buy [crude oil from] the US SPR," he said.



The price PetroChina paid for the oil is higher than the average $51.70/b the DOE received for the sale of 10 million barrels, and is the highest among all the winners, the DOE's data showed.

The analyst estimated the cargo would be co-loaded with some Latin American barrels so it can fill a VLCC before being shipped back to China.

"It will either be sold to PetroChina refineries or independent refineries," he said, ruling out the possibility of it being put into China's SPR as that would defeat the purpose of raising PetroChina's profile in the international markets given the secrecy maintained around the origins and suppliers of crude oil into the SPR.


US CRUDE FLOWS TO ASIA


A strengthening Dubai crude price since OPEC's decision to cut production has seen the Middle East crude benchmark swap commanding a premium over its US counterpart so far in 2017, prompting rare shipments from North America to Asia.

The Dubai/WTI spread has averaged $1.19/b so far in the first quarter this year. In comparison, the spread averaged at a discount of 50 cents/b in Q4 2016, and the average discount for Q3 2016 was even wider at 89 cents/b.

China imported 337,192 mt (2.5 million barrels) of North American crude in January, up 108% year on year, according to data from the General Administration of Customs.

At least 506,000 mt, or 3.71 million barrels, of such arbitrage barrels are expected to arrive in China in April.

Of the two cargoes that were imported in January, the 257,861 mt VLCC-size crude oil cargo from the US was likely shale oil from Eagle Ford, the first light crude barrels imported by China.

The high gasoline yields and low sulfur content of US crudes are attractive to Chinese refiners, who are seeking to boost 10 ppm sulfur gasoline output and reduce gasoil production. But light crude needs to be blended with heavy crudes before feeding most crude distillation units in China.

Inflows from the US last year included Alaska North Slope and were taken by refiners in east China's Ningbo and south China's Huizhou. ANS is a medium sour crude with a gravity of 32 API and sulfur content of 0.96%.

China's independent refiners have been showing interest in US crude since mid-2016 and Shandong-based Haiyou Petrochemical became the first independent refinery in January to run crude oil from North America.

Shandong-based Wonfull Petrochemical is looking to receive its Mars and Thunderhorse cargoes -- 1 million barrels each -- in April.

Furthermore, Asian crude traders pointed out that the narrow Brent/Dubai EFS spread would likely keep the South America-Asia arbitrage window wide open as some of the key Brazilian export grades including Roncador and Marlim are priced against the European benchmark.

The second-month EFS averaged $1.51/b in February, the lowest since August 2015 when it averaged 79 cents/b, Platts data showed. The EFS averaged $1.65/b in January, $2.17/b last December and $2.11/b in November 2016.

--Mriganka Jaipuriyar, mriganka.jaipuriyar@spglobal.com

--Oceana Zhou, oceana.zhou@spglobal.com

--Gawoon Philip Vahn, philip.vahn@spglobal.com

--Brian Scheid, brian.scheid@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com