US crude exports to Europe have declined in the past few weeks as the cost to move barrels across the Atlantic has risen. US crude editor Laura Huchzermeyer joins Americas crude oil managing editor John-Laurent Tronche to discuss this recent run-up in prices, and how the market is adapting to it.
TRONCHE: Hello and welcome to Platts Commodities Spotlight. My name is John-Laurent Tronche, and I manage the Americas crude oil market-reporting team at S&P Global Platts. I'm joined by Laura Huchzermeyer, an associate editor on the crude team here in Houston.
Today, we're talking US crude exports to Europe, specifically how a recent spike in freight rates has made more difficult the movement of US barrels over to Northwest Europe even though the Brent-WTI spread is at its widest point since the summer.
Laura, what's going on?
HUCHZERMEYER: Hi. Thanks, John-Laurent. As you said, the Brent-WTI spread, which is the difference between the US and global crude benchmarks, has been widening lately. It ended last week at just shy of $10/b. That's the widest spread we've seen since it really blew out over the summer. That was especially true in June, when the spread briefly spiked to more than $11/b, and averaged about $8.50/b over the month.
Normally, that's bullish for US crude exports. But we've actually seen a decline in US crude flows to Europe over the past few weeks as the cost to move the barrels has spiked.
TRONCHE: You're talking freight rates?
HUCHZERMEYER: That's right. In the first half of October, the per-barrel cost to move crude from the US Gulf Coast to Northwest Europe on an Aframax averaged about $2.15/b, which is only a little bit more than the year to-date average. That was low enough to allow for spot movement of crude from one region to the other, even if the Brent-WTI spread narrowed.
Since the halfway point of October, however, rates have averaged about $3.75/b. And for the last week or so rates have been at more than $4/b. That has made it more expensive to ship crude across the Atlantic, and we've seen a reduction in flows. US crude exports to Europe averaged about 550,000 b/d last week. Compare that to two and three weeks ago, when Trans-Atlantic flows were in the 750,000 to 800,000 b/d range. What we're seeing now is probably more term movement or companies optimizing their assets if they've got refineries in both locations.
TRONCHE: So freight rates go up, crude exports decline – what happens now?
HUCHZERMEYER: For the arb to Europe to open, FOB US Gulf Coast values will need to fall, delivered values will need to rise, or both. And we're starting to see that already, which is really a testament to how quickly these markets are able to react to changing fundamentals. As freight rates have risen, so too have US crude values in Northwest Europe. WTI delivered into Rotterdam ended last week at a $1.60/b premium to Platts Dated Brent, its highest value in more than one month. At the same time, WTI on a FOB USGC basis is declining relative to Platts Dated Brent. WTI FOB USGC is around Dated Brent minus $2.50/b to minus $3/b.
So, as quickly as the arb shuts, it looks like the market is responding and finding a way to adapt to higher freight rates, and that can mean booking larger tankers such as Suezmaxes or finding alternate destinations, such as Latin America and the Caribbean.
TRONCHE: Very interesting stuff. Laura, thanks for the update. If you'd like to learn more, please check out our website at https://www.spglobal.com/platts/en for more podcasts like this one, in addition to videos, blogs, presentations and of course plenty of news. Thanks for listening.