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US crude exports top 3 million b/d last week, but high freight rates still loom

Highlights

US crude exports averaged 3.06 million b/d last week: EIA

Trans-Atlantic Aframax rates climb nearly 72% since start of October

An Oct. 20 report from the US Energy Information Administration showed a more than 500,000 b/d uptick in weekly US crude exports over the week ended Oct. 15, but a narrowing Brent/WTI spread and rising freight rates continue to put pressure on US export economics.

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Crude exports in the week ended Oct. 15 were reported at 3.06 million b/d, up 546,000 b/d from the prior week, according to an EIA report. This marks the highest weekly export level EIA has reported since the week ended Aug. 13, when US crude exports averaged 3.431 million b/d over the period.

This uptick on the weekly figure brought the four-week moving average of US crude exports over the period ended Oct. 15 to 2.677 million b/d, up 63,000 b/d from the period ended the week prior.

Flows to Europe outpaced those to Asia in the week ended Oct. 15, with cFlow, Platts trade flow software, estimating US crude exports to Europe last week at 1.124 million b/d, while those to Asia averaged 1.04 million b/d.

But while export volumes to Europe have been elevated in recent months, a sharp narrowing of the Brent/WTI spread over the last two weeks and run-up on trans-Atlantic Aframax rates has pressured arbitrage economics for US crude exports into the region.

The Brent/WTI swaps spread, one indicator of the competitiveness of US crude on the international market, has narrowed by a full $1.44/b since Oct. 6 to $2.02/b, the most narrow the spread has been since Aug. 3 when it was at $1.94/b. As the spread narrows, WTI-based crudes are generally viewed as becoming less competitive in relation to their Brent-based counterparts.

This narrowing has been coupled with a run-up on freight rates, not just to Europe, but to Asia as well.

Freight rises amid higher demand

Freight for tankers carrying USGC crude exports to both Asian and European destinations has increased gradually since the beginning of September for VLCCs and October for the smaller Aframaxes.

Shipowners have been able to negotiate higher rates as increased demand heading into a seasonally strong fourth quarter, a gradual release of OPEC+ crude barrels into the market, and ever-shifting lockdown restrictions left global position lists thin and ships actively employed.

The cost of taking a VLCC on the benchmark 270,000 mt USGC-China run has pushed up to $5.5 million Oct. 20, up $450,000, or 8.9%, from Oct. 1.

The more volatile Aframax segment has seen a nearly 71.9% jump since the beginning of the month. The route was last assessed at w137.5, or $23.43/mt.

Cargo inquiry for both key export routes has shown a slight slowdown in cargo inquiry amid narrowing arbitrage economics, but rate levels remained elevated Oct. 20.

In the Forward Freight Agreement market, an expectation of a slight decrease in rates heading into November has been illustrated by bearish trading, with the November contract on the 70,000 mt USGC-UKC Aframax route last trading Oct. 20 at $19.3830/mt, or w113.75.

Arbitrage opportunities pressured

"Freight has gotten expensive, so not sure if we will trade at those levels," one trader said about current offer levels in the November loading cargo market. Another trader commented that arbitrage to Europe looks "very closed" given current levels for WTI crude cargoes into Northern Europe.

The impact on export volumes, however, could take some time to emerge in export data. "I think we need to wait and see how the exports will come out for [third-decade November] loadings," a third trader said, "that's the timing where most of the cargoes are being traded."

According to the Platts Crude Arbflow calculator, the arbitrage incentive for WTI MEH crude into Rotterdam against local Forties averaged minus 46 cents/b over the five-day period ended on Oct. 19. By comparison, through the first 19 days of October, the arbitrage incentive for the grade against the Forties averaged 27 cents/b, and as recently as Oct. 11, the arbitrage incentive was reported as high as 80 cents/b.