A rare combination of domestic and global events are driving the Argus Sour Crude Index (ASCI) to unseasonably high spot volume liquidity and prices, making the index a strong reflection of international markets.
Those global factors — including Asian interest in US sour crude in the face of Opec cuts and US refinery maintenance — may be short lived. But in the long run, ASCI will continue to closely reflect global sour fundamentals as US medium sour exports remain an option for buyers looking to fill supply gaps or take advantage of favorable economics.
Total spot volume traded for ASCI during the March trade month hit a new record high at over 737,000 b/d, more than 175,000 b/d higher than the previous record at close to 562,000 b/d hit in December 2016. But ASCI's average discount to West Texas Intermediate (WTI) for the March trade month was at just over $2.20/bl, more than 65¢/bl stronger than during February trade and close to $1/bl narrower than the average seen for the January trade month.
Two of the three grades that make up the ASCI benchmark — Mars, Poseidon and Southern Green Canyon (SGC) — saw increased trading.
March Mars spot volumes hit a record at over 569,000 b/d. Monthly reported Mars spot trade volumes have averaged about 347,000 b/d over the last year.
March SGC volumes were the second highest ever reported at 139,000 b/d, only about 1,000 b/d less than the prior high for October 2015 trade. Monthly reported spot trade volumes for SGC have averaged about 87,000 b/d over the prior 12 months.
And while reported Poseidon spot trade volumes for the March trade month were low, at only about 29,000 b/d, monthly reported Poseidon volumes have averaged just 43,000 b/d over the last year.
Traditionally, demand for medium sours in the US Gulf coast slows noticeably early in the year as regional refineries undergo maintenance in preparation for the peak summer US gasoline demand. In years past, this meant spot markets for US Gulf coast sours were relatively subdued with production going into storage until the end of maintenance. In 2016, total ASCI spot trade volume for March averaged less than 500,000 b/d and was at around 455,000 b/d in March of the prior year.
But this year the ability to export US volumes, combined with Opec and non-Opec production cuts and a relatively flat WTI forward curve — which removes incentives to store volumes — is creating both the desire and opportunity to export incremental medium sour volumes.
At the end of last year, the WTI forward curve was showing a 95¢/bl spread between the prompt and second months and a close to 75¢/bl spread between the second and third months. At the end of February those spreads had narrowed to 45¢/bl and less than 35¢/bl respectively.
Compliance with the agreed 1.2mn b/d Opec production cuts has so far been around 90pc while compliance with the combined Opec and non-Opec cuts, which were expected to amount to about 1.8mn b/d, has been pegged at about 86pc.
As a result, strong global demand for medium sours has emerged out of countries that are feeling the pinch from production cuts which have mostly affected the supplies of heavier grades. Combined with a relatively wide WTI discount to Ice Brent in recent weeks, this has put the US near the top of the list of alternative sources of supply. The result has been an uptick in spot trade for ASCI grades and a narrowing of the benchmark's discount to WTI.
The WTI-Ice Brent spread has remained at over $2/bl for the past month, at close to $2.10/bl at the start of March compared to about $2.30 at the beginning of February.
The resulting increase in demand for US sours led to an improved alignment in the ASCI price with other sour global markets. Like ASCI, values for Russian medium sour Urals at the Mediterranean have also risen in the past month with the grade's differential to North Sea Dated firming from a $1.70/bl discount at the end of last month to a $1.25/bl discount to the benchmark at the end of February for 140,000t shipments. Like US sours, Urals volumes have also been moving into Asia.
The likelihood that the surge in sour exports out of the US continues beyond the refinery maintenance season is in question, however. Once refinery maintenance is finished, domestic demand for sour crudes will likely keep volumes from leaving the country. This could lead to a marked narrowing in global sweet-sour spreads that had been generally expected because of Opec production cuts but has so far failed to materialize.
