By Clyde Russell
LAUNCESTON, Australia, June 4 – A tsunami of U.S. crude oil should be headed toward Asia, according to pricing on futures exchanges, but the reality in the physical market tells a somewhat different story.
The discount in the futures markets of the main U.S. light crude grade, West Texas Intermediate (WTI), to the global benchmark Brent crude CL-LCO1=R stood at $11.09 a barrel on June 1, the widest in more than three years.
And it’s not just a front-month aberration, with WTI’s discount to Brent for crude for delivery in six months CL-LCO6=R at $10.71 a barrel on June 1, the most since September 2014.
The pricing of WTI and Brent suggest that U.S. crude is now so cheap compared to its main competitor that refiners across the world, but especially in the main consuming region of Asia, should be snapping up vast quantities.
There is some evidence to suggest that this has happened in recent weeks, with vessel-tracking data compiled by Thomson Reuters Oil Research and Forecasts pointing to record arrivals of U.S. crude in Asia in June.
About 883,000 barrels per day (bpd) of U.S. crude is expected to land at Asian ports in June, up from 769,000 bpd in May, which was the previous high for U.S. crude exports to Asia.
While there may be scope for U.S. exports to push higher in coming months, they will probably be limited by both infrastructure constraints and a weakening of the economics.
While the paper futures market makes a compelling case for U.S. crude exports, pricing in the physical markets is far less convincing.
The price of WTI crude free-on-board at Houston , as assessed by Argus Media, was $73.71 a barrel on June 1, a premium of $7.90 a barrel, or 12 percent, to WTI futures on the New York Mercantile Exchange.
That means an Asian buyer of physical WTI crude for loading in Texas is paying quite a significant premium over the price of paper oil in the futures market.
The premium has risen sharply in recent weeks, given that it was closer to $3 a barrel at the end of April.
Further out along the curve also shows a widening premium for physical WTI crude over the futures, with December Houston WTI being $7 a barrel more expensive than the equivalent futures contract as at the end of May.
OPPOSING WTI, BRENT DYNAMICS
While physical WTI crude is currently at a strong premium to the futures, the opposite is the case when comparing paper Brent crude to the prices of similar physical grades.
Brent futures closed at $76.79 a barrel on June 1, above the $75.24 for Nigeria’s Bonny Light BON-E and the $74.34 for Angola’s Girassol grade.
Putting the numbers together shows that an Asian refiner seeking light, sweet crude, could have on June 1 bought a cargo from Angola at just 63 cents a barrel more than one from Houston.
This small advantage in favour of WTI from Houston would more than likely be eaten up by the increase in shipping costs, given that Texas is a far longer voyage to Asia than is Angola.
Overall, the seemingly huge advantage that WTI enjoys over crudes priced against Brent disappears once you make the jump from the paper to the physical markets.
While arbitrage investors may enjoy such a situation, the current pricing of physical crude oil suggests that U.S. shipments to Asia may struggle to be competitive in the second half of the year.
One side issue worth mentioning is the potential impact of geopolitical concerns.
If China and the United States do manage to reach some kind of trade consensus, it may encourage Chinese buying of U.S. crude, even if it doesn’t necessarily make economic sense.
On the other hand, an escalating trade dispute may see China’s state-owned refiners take less U.S. crude, and so far, it’s far from certain which is the more likely of those two outcomes.
Editing by Christian Schmollinger