5 September 2016

A drop in global shipping costs and competitive pricing of crude produced in North America is opening the door for US crude exports to reach Asia-Pacific more economically than rival grades from elsewhere in the Atlantic basin, including the North Sea and west Africa, according to a comparison of delivered crude prices launched by global commodity market price reporting agency Argus this month.

US crude exports to countries other than Canada soared to more than 350,000 b/d in May, less than six months after Washington lifted a four-decade ban on shipments abroad. Including Canada, US exports have doubled in the past two years to almost 700,000 b/d. China and Japan are now regular importers of US crude, with occasional purchases from South Korea, India and Singapore.

As US exports rise, refiners around the world are looking for opportunities to buy North American supplies, which are cheaper than traditional sources for light sweet crude. The price of US marker grade West Texas Intermediate (WTI) exported from Houston and delivered to Asia-Pacific was about 50¢/bl lower than similar quality Nigerian Qua Iboe crude in the second half of August, the new Argus WTI Houston cfr China price shows, implying that a 1mn bl US cargo would land $500,000 cheaper than its west African rival in the world’s fastest growing market. WTI Houston delivered to China is now breaking even with lower quality North Sea Forties, a staple import for South Korean and Chinese refiners. Compared with Caspian grades such as Azeri Light, WTI Houston delivered to China has been almost $1.50/bl cheaper on average over the past two weeks.

Refiners from around the world are looking to increase crude purchases from reliable suppliers in North America, while rival producers from different regions are focusing their efforts to remain competitive relative to US exports. And that battle for market share is fiercest in the growing Asia-Pacific market, where price comparisons are most relevant after taking into account export and freight costs from multiple origins. As the leader in North American crude pricing, Argus is also pioneering the publication of price assessments for Canadian crude loaded in the Gulf of Mexico for delivery to Asia-Pacific destinations, including China. Heavy sour Western Canadian Select (WCS) re-exported from US Gulf coast terminals has the potential to reach India and beyond. 

To calculate the delivered price of WTI Houston and WCS Houston crude to China, Argus takes the daily volume-weighted average (VWA) of all deals done during the entire trading day for each grade, adds export terminal costs and the daily freight rate for the US Gulf coast-to-China route for Suezmax (130,000t) cargoes and publishes the delivered price of these two grades in the Asia-Pacific section of the Argus Crude report. The Argus WTI Houston price can easily be hedged because it is traded on the CME and Ice exchanges and is linked to Nymex WTI futures. There is no paper trade on WCS Houston.
The expansion and development of export capacity on the US Gulf coast, especially the planned completion next year of infrastructure linked to the Magellan East Houston terminal where WTI Houston is priced, will accelerate these flows.

“The US Gulf coast is now an important region for crude price discovery. The new Argus WTI Houston and WCS Houston delivered to China assessments respond to the market need for a price reference for these deals, linking unconventional US shale and Canadian oil sands production to the international seaborne crude market,” Argus Media executive chairman and publisher Adrian Binks said.