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US Crude Floods Asia Following SPR Sale

Copyright © 2021 Energy Intelligence Group

A flood of US crude is headed for Asia, driven largely by the sale of barrels from the US Strategic Petroleum Reserve (SPR), which has dragged down both the relative price of the West Texas Intermediate (WTI) benchmark and the US Gulf Coast sour crude market. This -- combined with fairly cheap freight rates and a relatively firm Dubai benchmark price -- has helped to open up the US crude arbitrage window to Asia. An Asian trader described the effects of the US move to sell oil held in its strategic stockpile as a "summer sale" of US crudes for Asian buyers. Roughly 12 million barrels of US crude -- mostly heavy, sour Mars -- is headed to China, South Korea, Taiwan and Japan, scheduled for Northeast Asia arrivals in November and December, according to Asian market sources. The volumes would arrive in Asia as Opec-plus continues to expand its production, with the influx of US Mars crude likely to exert some downward pressure on sour Mideast crude markets, said two Asian market players. US crudes, mostly Mars, have been offered into Asia by BP, Shell, Equinor and Koch, said three Asian traders. One US-based shipbroker said that while the impending exports would likely not be actual SPR barrels, the release “facilitates rising exports." "Our SPR is what refiners here like, and what we produce [light, sweet crude] is not what they like,” he said. To wit, the SPR will award contracts through mid-September but will not release any actual volumes until October. However, the shipbroker noted that US refineries are set to enter maintenance shortly, with some 1 million b/d in throughput capacity likely to go offline in September. "There are already four Suezmax vessels heading east in September -- that’s typically a sign of a good month” for exports, he said. Cheap Crude Asian buyers snapped up Mars cargoes at premiums ranging from 50¢-60¢ per barrel to $1.60/bbl to Dubai, traders said. Some Mars barrels were also bought at a discount of $1.00/bbl to the ICE Brent futures price. All the cargoes were sold on a delivered pricing basis, they said. The cargoes are “all very cheap,” said a Northeast Asian refiner source. A Mideast producer source agreed, saying that “the price is really attractive” to Asian refiners. Essentially, Mars delivered prices are comparable to similar Mideast crudes, an analyst said. China’s Unipec, the trading arm of Sinopec, has snapped up somewhere between 2 million-6 million bbl of Mars, said several market sources. The volumes are expected to arrive in China in November and early December. It is unclear if Unipec has sold or plans to sell some of those volumes to other Asian buyers, however. Rongsheng, the majority owner of China’s biggest refinery, bought 2 million bbl of Mars from Equinor, the sources noted (IOD Aug.13'21). In South Korea, refiner GS Caltex bought 3 million bbl of Mars crude that will arrive in Korea in November, a regional source said. GS typically buys at least one very large crude carrier (VLCC) of US crude every month, according to sources. A VLCC carries up to 2 million bbl of crude. Japanese refiner Fuji Oil also bought 1 million bbl of Mars that will arrive in Japan in December, said two market players. In Taiwan, refiner CPC bought 2 million bbl of WTI Midland crude from global trading house Trafigura at a premium to Dubai of around $1.10/bbl on a delivered basis into Taiwan -- not an unusual purchased volume for CPC, sources said. Arbitrage Surge The main driver of this flood of US crude to Asia is the US Department of Energy (DOE)’s announcement on Aug. 23 that it would be selling 20 million bbl of sour crude from the SPR for delivery from October to mid-December, sources say (OD Aug.23'21). The SPR’s release consists entirely of grades that are Mars look-alikes. The US Gulf Coast physical sour crude market has weakened as a result while WTI futures also softened relative to Brent, said one trading analyst. “Mars almost collapsed,” said an Asian market player, popping open the Mars arbitrage window to Asia. WTI futures prices have weakened by around $1.00/bbl relative to Brent futures over the last week. Freight is also relatively cheap. Front-month Dubai benchmark prices are stronger than future levels, which also raised the competitiveness of Mars crude relative to Mideast and other Dubai-priced crudes in Asia, said a trader. Freddie Yap, Singapore, and Frans Koster, New York

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