Global crude differentials have narrowed and higher crude oil volumes are moving from west to east. S&P Global Platts trade flow tool cFlow shows that in April alone, China likely saw the arrival of at least six VLCCs and four Suez-max vessels transporting North American crude. In this video, S&P Global Platts senior analyst Yen Ling Song examines China's appetite for US crude and how this might affect the flow of supply from Russia.
Video Transcript
Changing trade flows and China's diverse appetite for crude oil
By Yen Ling Song, Senior Oil Analyst
Welcome to The Snapshot, our series which examines the forces shaping and driving global commodities markets today.
Following an agreement by OPEC and non-OPEC members to curb crude output by close to a combined 1.6 million b/d at the end of November, and OPEC member countries subsequently achieving a high level of compliance, global crude differentials have narrowed, with the Middle Eastern crude benchmark Dubai strengthening and making it possible to move more crude from west to east.
Refineries in Asia have therefore been taking advantage of this open arbitrage to buy more crude from the Atlantic Basin, including West African, North Sea and US grades.
With a steady rise in crude oil prices in the last six months, US crude production has increased by nearly 500,000 b/d this year to over 9.2 million b/d, the highest level since August 2015. As a result, US crude oil exports have been steadily rising. In February alone, exports hit a record high 1.08 million b/d.
China has become the largest buyer of incremental crude exports coming out of the US, with February loadings rising to a new high of over 340,000 b/d. The crudes are being taken by both state-owned oil companies as well as independent refiners.
In April China likely saw the arrival of at least six VLCCs and four Suez-max vessels transporting North American crude, delivered to ports such as Qingdao, Rizhao and Dalian.This is according to S&P Global Platts trade flow software, cFlow.
The inflow of low sulfur Atlantic Basin crudes into China comes at a time when it is also moving to lower sulfur specifications for its transport fuels. At the start of this year, China moved to the National Phase 5 standard nationwide, capping sulfur limits for gasoline and motor diesel at 10 parts per million.
Some independent refiners in China are also on the lookout for light, sweet grades to blend with their intake of heavy Venezuelan crude.
However the US is not only exporting light, sweet grades from its shale basins. China has also bought medium to heavy sour grades Southern Green Canyon, Mars produced in the Gulf of Mexico, alongside sweeter and lighter crudes like Thunderhorse and White Rose and Hibernia from Canada.
Until the OPEC production cuts are reversed, the expectation is for differentials between Brent and Dubai and Dubai and WTI to remain tight. And China, with a long history of crude supply diversification, will likely continue to import more North American crude oil as well.
This will have some implications for Russia, which was China’s top supplier of crude oil in 2016. Given that its primary export blend ESPO would likely compete with Atlantic Basin crudes. Already the share of Russian crude oil among China’s overall imports so far this year has fallen from the same time in 2016. So it remains to be seen if Russia can hold on to its market share in China.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.