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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Expensive Middle East Crude Could Lose Market Share To U.S. Shale

US Oil

OPEC’s production cuts have put a floor under oil prices, at least for now. The resulting reduced supplies have also boosted the price of Middle East crude grades, and increased the spread between WTI and Brent. WTI is now trading at a discount of more than $2.20 compared to Brent.

The current price differentials have made flows of U.S. crude oil to Asia commercially profitable after the Saudi-led production cuts resulted in higher Dubai and Oman benchmark prices against the U.S. benchmark WTI and the Brent benchmark. Therefore, commodity traders and oil supermajors are taking advantage of this arbitrage window to send more crude oil to the region with the world’s highest demand – Asia - which is the traditional stronghold of Middle East crude oil exports. But Middle Eastern exporters have been very carefully selecting which buyers to cut off as part of the OPEC output reduction, and they are certainly not giving up core markets and market share while complying with the cartel’s promised cuts.

Nevertheless, shipments of U.S. crude oil to Asia are set to jump in February, and may result in a supply surplus and lower regional Asian grade prices, traders and analysts reckon.

According to traders’ estimates compiled by Reuters, the U.S. is expected to export between 700,000 bpd and 900,000 bpd this month, most of which is bound for Asia.

Should this be the case, February would see the highest U.S. crude oil exports on record so far. Since the U.S. lifted restrictions on exporting crude a year ago, oil sales abroad have taken on a sluggish and uneven start, but in September last year they touched their highest level ever at 692,000 bpd, data by the Energy Information Administration (EIA) show. For November, the latest available EIA figures, U.S. crude oil exports were 597,000 bpd. Related: Oil Prices Fall Ahead Of Inventory Data

According to Reuters trading sources and shipping data, this month U.S. exports – both light and heavy crudes – would go to China, Japan and Singapore in Asia, and to Europe and Latin America. Oil majors BP and Shell are reportedly sending cargoes from the U.S. Gulf to Singapore, while in another move, BP and trader Trafigura are said to be selling in Asia at least 3 million barrels of oil from the Eagle Ford.

The rising Dubai and Oman crude grade prices have made U.S. cargoes relatively cheaper, and commodity traders are using this window of opportunity to ship U.S. oil to Asia—an option that would not have made business sense a couple of months ago.

In addition to providing an incentive for U.S. oil flows to Asia, the rise in Dubai crude prices led to the Brent premium to Dubai price dropping to a 16-month low $1.46 per barrel in January, which opened an opportunity for Brent-linked North Sea oil shipments to Asia. Related: It’s Time For Big Oil To Embrace The Digital Age

So it was: crude oil from the North Sea was flowing to Asia at record rates in January and was set to reach 12 million barrels. Asia-bound crude cargoes from West Africa are also on the rise, and may well reach in February their highest level in at least five and a half years.

Still, oil from the Middle East would continue to be the “base flow” of Asian refiners, together with West African shipments, Kho Hui Meng, head of the Asian arm at Vitol Group, said in an interview with Bloomberg over the weekend. But U.S. and North Sea cargoes may not be flocking as much to Asia in the coming months because arbitrage windows can open and close with market volatility, the manager noted.

Whether these rarer crude cargoes from regions such as North America and the North Sea will continue to flow to Asia would mostly depend on the spreads between the various regional benchmarks, because the Middle Eastern exporters – even with OPEC cuts – are not ceding ground in their key Asian, especially northern Asian, market.

By Tsvetana Paraskova for Oilprice.com

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