Some Asian refiners may have cooled their interest in US WTI crude due to more availability of prompt Middle Eastern crude and rising freight costs, although others are expected to maintain their purchases given ongoing uncertainty over the stability of Mideast Gulf crude flows.
Traders pegged WTI arriving in January in northeast Asia at premiums slightly below $30/bl to December Dubai assessments. This was weaker than record-high premiums of $30-35/bl against November Dubai assessments that December-arrival cargoes traded at last month, after fresh US-Iran hostilities sparked concerns about Mideast Gulf supply disruptions and boosted Asian demand for US crude.
Attacks on Saudi Arabia's 7mn b/d East-West crude pipeline in early September had pushed Asian buyers to step up their purchases of WTI as an alternative to Mideast Gulf crude. Some market sources said Asian refiners may have bought close to 2mn b/d of December-arrival US crude in the last trading cycle, which would be the highest monthly delivery volume since June, based on data from trade analytics platforms Kpler and Vortexa. Others said total purchases might be closer to 1mn b/d.
Asian buying of US crude has been slow to start in the current trading cycle for January-arrival cargoes, with minimal activity for January-delivery cargoes heard as of 1 October. By comparison, around 4mn-6mn of December-arrival US crude including WTI had already traded by 1 September, according to Argus tracking.
Increased availability of prompt Middle East crude for Asian buyers was a key reason for the reduced buying interest in WTI recently, traders said. Saudi Arabia, especially, has been boosting crude exports, with refiners in Japan, South Korea and India snapping up spot volumes.
The total volume of crude exported through ship-to-ship (STS) operations outside the strait of Hormuz reached about 4mn b/d in September, according to Vortexa data. Saudi supplies accounted for 1.1mn b/d or 27.5pc of the total, up from 470,000 b/d or 8pc a month earlier. Saudi Arabia also appears to be restarting crude exports from the Red Sea port of Yanbu, shipbrokers said, after a gap of nearly three weeks caused by war damage to the East-West pipeline.
US vs them
South Korea is a key buyer of US crude in Asia-Pacific. But current WTI offer levels for January arrivals in northeast Asia are still too high, a South Korean refinery source said, and cheaper cargoes of heavy crude from Canada, Ecuador and Mexico are comparatively more attractive.
Seoul has been encouraging domestic refiners to buy non-Mideast Gulf crude through a government freight rebate scheme, as part of its supply diversification efforts. It now aims to provide a 100pc freight rebate to further incentivise domestic refiners to purchase crude supplies from sources outside the Middle East, including the US, Europe and Africa.
Current elevated freight costs serve as a significant disincentive to buy long-haul crude, market participants said. Rising freight rates, largely attributable to tightening vessel availability, may be weighing on US crude purchasing decisions among Asian buyers, a Japanese refinery source said. The Argus-assessed freight rate for a very-large crude carrier (VLCC) performing a voyage from the US Gulf coast to South Korea/Japan was at $11.65/bl at the start of September, before more than doubling to about $24/bl by the end of the month.
The increase coincided with a surge in tonne-mile demand when tankers carrying crude from Yanbu to east Asia were forced to sail around South Africa's Cape of Good Hope rather than through the Bab el-Mandeb strait because of threats from Yemen's Houthi rebels. The diversion adds around 29 days to the voyage, keeping vessels occupied for longer and delaying their return to the spot market. This has effectively tightened available fleet supply and contributed to upward pressure on freight rates.
Despite the slow start to the current trade cycle, some market participants said there was still plenty of time for Asian buyers to step up purchases for January-arrival WTI. Some refiners may still choose to maintain their WTI purchases to avoid any uncertainty over Middle East crude flows, one trader said. This could continue to underpin delivered northeast Asia prices, he added. Some Japanese refiners may have picked up US crude likely for January delivery over 1-2 October, market sources said, although details were unconfirmed. Japan has historically imported most of its crude from the Middle East, but has relied on US crude to cope with the disruptions to those supplies since March.
Thailand's demand for WTI is also expected to remain strong because of uncertainty over the reliability of Middle Eastern crude exports shipped through the strait of Hormuz, a Thai refinery source said. The US was the second-largest supplier of crude to Thailand over January-September, with deliveries averaging around 143,000 b/d, according to data from oil analytics firm Vortexa.
