Blending crude can make some grades more appealing to buyers
Two tankers of US oil arrived in Europe last week, delivering the first cargoes allowed since Washington repealed a decades-old ban on exporting crude. With two more vessels now crossing the Atlantic, oil market watchers have a simple question: why?
Benchmark US crude costs as much as its international peer pumped from the North Sea. The economics suggest it would cheaper for a European refiner to buy in its own backyard — say, from Algeria — than pay to haul oil all the way from Texas.
Yet the tankers Angelica Schulte and Minerva Astra are now steaming towards France and Italy with a combined 1.2m barrels on board, according to Clipper Data.
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The surprising spurt of traffic points to an emerging new reality since US President Barack Obama signed a law allowing unfettered exports last month. The flows, while modest, suggest traders are already finding ways to profit by shipping American oil abroad, even as it remains one of the world’s biggest crude oil importers.
Despite seemingly uncompetitive prices, some grades of US oil might be attractive in certain markets, or made appealing by blending or using strategies understood by sophisticated trading houses.
Few expect a flood of US oil upending world markets. On Monday, West Texas Intermediate, the US benchmark, traded at $31.30 a barrel. The global benchmark Brent traded at $31.28.
“If you look at the Brent-WTI spread, the curve is telling the market to keep light, sweet crude domestic,” says Thomas Ramsey, chief executive of Texas-based Centurion Terminals and a former senior executive at Vitol, the world’s largest independent oil trading house.
But already, energy companies are positioning to handle exports beyond the flows to Canada that were allowed under the previous restrictions. NuStar Energy, an oil pipeline and tank company, is building a fourth dock to allow it to export more crude from the Eagle Ford shale formation in Texas, adding to its 350,000-400,000 b/d of existing capacity. Plains All American Pipeline, another logistics company, can load crude for export at terminals in Corpus Christi and at St James, Louisiana.
“If you play forward five years and you believe in the growth in the US, the barrels have to go somewhere,” Willie Chiang, Plains’s chief operating officer, told investors in mid-January.
The oil derivatives market has also begun to adjust, with CME Group, the exchange operator, unveiling futures contracts based on the price of West Texas Intermediate crude delivered at Houston, an alternative to the contract’s traditional delivery point in landlocked Oklahoma.
In some instances, further exports might make sense. John Demopoulos, senior markets manager at Argus Media, says European refiners could purchase Saharan Blend crude from Algeria or Bonny Light from Nigeria for discounts of $1 or more to WTI-quality crude exported from Houston.
“But the economics into Asia-Pacific look a great deal better,” he adds. “A refiner in Korea would only be paying an extra 25 cents a barrel to take WTI rather than, say, a similar Vietnamese crude, and for some refiners the particular qualities of a WTI barrel might make it a better buy than the Vietnamese.”
Reuters last week reported that Sinopec of China had purchased a cargo of US crude oil for export from the US Gulf coast in March.
The US is also seeing higher imports of nearly 8m barrels a day as domestic output slows in the face of lower prices. Shipments from Russia have picked up to refineries on the US Gulf coast, which are well-suited to processing Russia’s heavier Urals blend. Imports from west Africa, which had all but collapsed during the shale boom, are also starting to recover.
Traders also see more esoteric ways to benefit from US exports. Vitol, which picked up the first post-ban cargo to take to its refinery in Switzerland, appears to have made the arbitrage work in a number of ways.
The ship, the Theo T, took almost three weeks to sail from Texas to the French port of Fos — a journey that can normally be accomplished in about 10 days, according to trading and shipping sources.
So-called slow-steaming saves fuel costs but can also allow traders to benefit from a market structure called contango, when prices are higher for later delivery.
The Theo T tanker also made a pit-stop at a ship-to-ship transfer berth in Gibraltar, leading to speculation the trading house may have blended some of its ultralight cargo from Texas’s Eagle Ford shale with heavier crude at sea. Vitol declined to comment on the ship’s movements.
“There are always ways to be creative,” one London-based trader said.