Calculations point toward a chance for US sour crude oil grades like Mars and Southern Green Canyon to find a market in Northwest Europe, where they could potentially displace OPEC or Russian barrels. James Bambino, who has been tracking crude and refined oil product flows, crunches the numbers and considers Europe's Urals market, freight rates, refinery runs along the US Gulf Coast, demand and capacity. How long could the opportunity last, and will the market take advantage of it?
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Video Transcript
Could US sour crude oil be exported to Europe at the expense of other grades?
By James Bambino, managing editor, Oilgram Price Report
Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.
US crude exports have been on a tear lately. In fact, my PIRA colleagues in a recent note tout the number could reach 2.25 million b/d by 2020.
We’re not quite there yet, and it’s important to remember US exports are not just of the light sweet variety pouring out of the Permian. No, more and more medium sour grades like Mars and Southern Green Canyon are actually finding their way into the Asian market.
US sour crude barrels expected in Europe soon, possibly displacing OPEC and Russian barrels
And by my calculations, it's only a matter of time until they begin heading to Europe, possibly displacing OPEC, and in this case, Russian barrels. Platts data shows Mars and SGC cargoes would have delivered into Europe at discounts of $1.22/b and $1.34/b, respectively, to CIF Rotterdam Urals in June.
Urals hasn't been this strong since 2014, driven by tighter loadings out of Primorsk in the Baltics, and fewer Saudi barrels in Northwest Europe. Our cflow shiptracking software shows declining Persian Gulf flows into Rotterdam, and Saudi OSPs suggest they're trying to dissuade any additional interest.
Still, no fixtures have been heard yet, despite the apparent profitability. Why?
Cheap freight, including weak USGC dirty tanker market, could encourage arbitrage opportunity
First, my calculations suggest freight is cheap, around 94 cents/b, not enough to discourage the arb. And the US Gulf Coast dirty market is weak right now, so charterers can likely negotiate better rates. Shipowners would be keen to make this voyage for the prospect of more lucrative follow-on routes, rather than churning out an intraregional back and forth.
Stable Brent/WTI spread suggests arbitrage could be easily hedged
Second, the Brent/WTI spread has been stable between $2-3 a barrel, which suggests this arbitrage could be easily hedged.
Third, as I said earlier, if Northwest Europe is as tight as traders say it is, and Urals and Saudi Arab Medium continue to rally, it should only be a matter of time before grades like Mars and SGC make their way over.
So why haven't they yet?
High demand from USGC refiners and Asia could price grades out of Europe
US Gulf Coast runs are near record highs. It's nearly a miracle that any of these barrels make it to Asia at all, considering how prized they are in their home market. Combined local and Asian demand could quickly begin to price these grades out of Europe as there is only so much of it available.
European coking capacity is under a tenth of that in the US. This suggests they're ill-equipped to maximize the profitably available in running these grades.
Lastly, Urals strength may not last should loadings return to normal, and despite the strong signals from Saudi OSPs, these grades still hold a discount to US sours. When looked at through this lens, it appears the Saudis are not as willing to cede market share in NWE as many may have presumed.
Until next time on the Snapshot, we’ll keep an eye on the markets.