Alaskan North Slope (ANS) crude oil exports to China surfaced this year on an interim trade deal signed by Beijing and Washington and as US west coast refining slackens on Covid-19 demand destruction.
In this episode of The Crude Report, Alex Endress, US Gulf coast crude markets reporter, is joined by Benjamin Peyton, North American waterborne markets and the west coast reporter - who also heads up Argus' ANS coverage - discuss how much ANS is going into China and some of the driving forces behind the recent uptick.
Alex Endress: Hello and welcome to The Crude Report, a podcast series on global crude oil markets.
I'm Alex Endress for Argus Media and I cover US Gulf coast crude markets for Argus, but today we're gonna be chatting about Alaska North Slope, or ANS. And more specifically, we're looking at how ANS trade flows with China are strengthening. Joining me to do that is Benjamin Peyton, our reporter that covers North American waterborne markets in the West coast, and he heads up ANS coverage.
So, Ben, thanks for joining today.
Can you maybe just start by explaining how much ANS is going to China these days?
Source: Vortexa and FleetMon vessel tracking services
Benjamin Peyton: Hi, Alex. Sure. I'd be happy to. So far in December, we've seen one Suezmax tanker loaded at the port of Valdez, Alaska, signaling the port of Qingdao, China for arrival later this month. We're also seeing another tanker expected to arrive in Alaska later this month and could be used for export as well, according to vessel-tracking data. This will continue a trend we've noticed in each of the last three months. Two cargoes of ANS were exported in September, October, and November, respectively. ANS is still primarily shipped domestically to the US West coast, but exports to China surfaced this year beginning in April.
Alex: So what are some of the driving forces behind this recent uptick that you've seen?
Benjamin: Several things are supporting the flow of ANS to China, we believe, particularly the interim trade deal signed by Beijing and Washington in January. The deal included commitments measured in dollars to purchase US energy products. China, under the terms of the deal, had agreed to more than double its energy purchases from the US this year from 2017 levels, and then to further double it again in 2021. This commits China to buying $69bn of US energy commodities in 2020 in 2021. This includes LNG, coal, refined products, and what we're most interested in today, crude. The agreement notes that purchases will be made at market prices based on market conditions. This could be what complicated the rollout of the deal after the Covid-19 pandemic/demand and disrupted pricing. And you could see why ANS exports this year began in April.
Alex: So, Ben, is it fair to say the link between China and ANS remains strong?
Benjamin: It remains to be seen whether crude flows of ANS to China continue, but we've seen steady demand throughout this year. China was also the top destination for total US crude exports in May through October. US exports to China have been volatile this year. They hit a record high of 1.26mn b/d in May up sharply from just 114,000 b/d in April, 108,000 b/d in March, and zero in January and February, according to trade data by the US Census Bureau. The latest we have from the US Census Bureau is that China took 679,000 b/d of US crude loaded in October.
Alex: And we know that demand from the Asia-Pacific has materialized for several different US sour grades, but has there been any more demand for ANS in particular?
Benjamin: We do think there's been more demand for ANS this year. The export arbitrage from Alaska to China could be drawing support from lower freight rates in the region. Asia-bound Suezmax voyages out of Americas fell to at or near multi-year lows in October, unlimited chartering activity, and in abundance of tonnage supply as crude and floating storage unwound from a peak in May. Similar voyages were priced higher earlier this year when Covid-19-related demand loss prompted favorable floating storage and China stockpiled discounted crude. In fact, earlier this year, we saw ANS exported to China on Jones Act-compliant tankers, despite typically being more expensive to charter than an internationally flagged vessel.
Alex: And so Jones Act-compliant vessels are primarily used for domestic shipments such as ANS to the West Coast, but do we often see that in the export market?
Benjamin: They are primarily used for domestic shipments to the West coast and they're typically not used for exports. Usually, the freight cost is prohibitive, but this year we saw five cargoes of ANS chartered on domestic flag vessels in April through September. In fact, we did see the Jones Act-compliant Alaskan Navigator, usually reserved for ANS shipments to the US West coast, chartered for an export to China in April at a rate that was $100,000 per day lower than what an internationally flagged tanker would have cost for the same voyage. Of course, Jones Act-compliant takers are primarily designed for shipments to the US West coast, and it remains to be seen if exports would be used again by a US flagged vessel.
Alex: So we know that the majority of ANS refined in the US does happen in the West coast, but has some of that demand fallen off?
Benjamin: US West coast refining demand has plummeted this year following the Covid-19 lockdown measures in the region. Alaskan oil shipments to the region have remained steady despite the demand loss, but inputs are down by nearly 25% or 565,000 b/d to 1.85mn b/d, compared to the prior year at the US West coast over the last month. Recently, California implemented a three-week regional stay at home order effective 5th of December to curb the spread of Covid-19, which may further dampen demand for transportation fuels during this Christmas holiday season. The state of Washington extended Covid-19 lockdown measures implemented on 16th of November by 3 weeks to the 4th of January.
Alex: On the domestic side, you know, is some of this lower ANS demand in North America by chance making ANS more competitive in the international market?
Benjamin: We do think that demand destruction at the US West coast is putting pressure on ANS to be exported. China refinery crude throughputs were 13.8mn b/d in October and 14mn b/d in September, which was roughly 3% higher than the prior year Argus surveys indicate. That compares to US West coast refining demand, which was 1.9mn b/d, or 21% less than prior year levels at the same time, according to the US Energy Information Administration. ANS shipment to the US West coast are nearly unchanged year on year at 3.5mn bls on a weekly average since September despite the low demand environment. Competing imports to the region though have waned by roughly 30% or by over 400,000 b/d to 876,000 b/d at the same time.
Alex: Well, Ben, thanks for chatting. It does sound like an interesting trend. And I guess just to sum things up, sounds like the combination of this trade deal and lower demand at the West coast might be supporting this link to China.
Benjamin: Thanks, Alex. I was glad to participate. It remains to be seen of crude flows of ANS to China will continue into the new administration next year. And as a recovery in US West coast refining demand is uncertain.
Alex: Yeah, and listeners, if you're in need of more in-depth daily coverage of US crude oil markets, as we head towards the new year, consider subscribing to Argus Americas Crude. You can find more information on this service at www.argusmedia.com. Thank you for tuning in, and we look forward to you joining us on the next episode of The Crude Report.