New wave of US crude cargoes to reach Asia late Q4 amid lofty Dubai prices

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A fresh wave of North American crude cargoes could reach the Far East in the coming months, with an estimated 6 million barrels or more of light sweet US grades loading in November expected to find a home in Asia as regional end-users step up efforts to find cheaper feedstocks amid sustained strength in the Middle Eastern crude complex, Asian trade sources said.

  • At least four VLCCs of US crude for Nov loading seen heading to Asia
  • South Korean refiners, oil major among buyers
  • WTI complex seen cheaper as Dubai market structure extends rally

Asian refiners have been actively searching for affordable North American crude supplies for processing in winter, and at least four VLCC vessels carrying WTI Midland, Eagle Ford crude and condensate for lifting in November will make the journey to the East, three market sources familiar with the matter told S&P Global Platts.

“At least two VLCCs were snapped up by South Korean end-users,” a trading source based in Seoul with knowledge of the deals said, indicating that the delivery should be made by late December or early January.

An oil major is expected to bring one of the November-loading VLCC cargoes to Asia, while the latest shipping fixtures indicating that Glencore is scheduled to deliver a minimum 1 million-barrel cargo of US crude for loading over November 25-30 from the US Gulf Coast to an unidentified Northeast Asian refiner, the sources said.

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Market talk also indicated that Trafigura could also bring one November-loading VLCC vessel carrying Eagle Ford crude and condensate to Asia. However, trading managers at the European trading firm could not immediately be reached for comment and the details could not be confirmed.

“Some of the [November VLCC] cargoes are for co-loading [with non-US grades] … I have counted at least 6 million barrels [of US crude grades] so far but there could be many more new [November cargo] deals to come,” said an Asian trading source.

The pending influx of US crude cargoes in late Q4 and early 2018 would help extend the robust US-Asia arbitrage trade momentum so far in the second half of 2017, following up from the slew of North American crude purchases from South Asian end-users over the past several weeks.

Earlier this month, Indian refining and petrochemical giant Reliance Industries Ltd. bought 1 million barrels each of the WTI Midland sweet grade and Eagle Ford shale oil for delivery on the west coast in November.

India’s Bharat Oman Refineries Ltd. made its first purchase of Mars crude last month, picking up 1 million barrels of the medium sour US grade for delivery during the third week of November.

Indian Oil Corp. signed an offtake deal in July for 1.6 million barrels of Mars and 400,000 barrels of Western Canadian Select.

BULLISH DUBAI MARKET STRUCTURE

With the Dubai crude market structure maintaining its bullish momentum, the new wave of US-Asia arbitrage flows comes as little surprise, market participants said.

Dubai crude saw both its physical and derivatives market structures continue to strengthen this month, supported by tightening Middle Eastern crude exports to Asia.

Market sources said earlier this week that a number of Saudi crude oil buyers in Northeast Asia had received up to a 10% reduction in their term volumes for November loadings, while Abu Dhabi National Oil Co. cut its allocations for November-loading crude by up to 15% for most of its customers.

The cuts signal Saudi Arabia and the UAE’s strong commitment under OPEC’s November 30, 2016, deal to reduce production by 486,000 b/d and 139,000 b/d, respectively, from last October levels.

“It all makes perfect sense in terms of market economics. Middle Eastern term barrels [to Asia] are sharply reduced and the Dubai market is very expensive … it really is cheaper to buy US cargoes, even including freight and all,” said a sour crude trader based in Singapore.

Platts assessed front-month cash Dubai at $54.79/b at the close of Asian trade Wednesday, taking into consideration trades for cash Dubai partials at $54.78/b and a bid at that price standing at the end of the Platts Market on Close assessment process in Singapore.

This put the spread between December cash Dubai and December Dubai swap at 59 cents/b, the highest since August 31, 2015, when it was 64 cents/b.

The sustained strength in the Dubai market has subsequently kept WTI prices at a steep discount to the Middle Eastern pricing benchmark.

The spread between the front-month Dubai crude swap against same-month WTI swap has averaged $3.45/b so far in the fourth quarter, up from $2.28/b in Q3, $1.29/b in Q2 and 51 cents/b in Q1, and against an average discount of $1.62/b in Q4 last year, according to Platts data.

A weaker WTI versus Dubai spread typically makes North American crude grades priced against WTI more competitive.

At the same time, WTI/Brent futures spreads have been falling sharply over the past few months, with NYMEX December WTI crude futures seen trading at a discount of $5.43/b to the same-month ICE Brent crude futures at 0830 GMT Thursday.

“Spot differentials in the US are rising too but it’s still cheaper than buying some of the expensive light sour grades in the Middle East, like [Abu Dhabi’s] Murban crude,” said the source based in Seoul.

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

–Edited by Wendy Wells, wendy.wells@spglobal.com