US waterborne crude falls on higher freight, supply

Unseasonably high freight rates and rising global crude supply have pressured the waterborne price of US light sweet West Texas Intermediate (WTI) to a roughly four-month low, despite ample demand.

WTI fob Houston fell $3.85/bl against July Ice Brent week-on-week to a $1.80/bl discount on 6 May, reflecting the waterborne crude's lowest value against the international benchmark since 9 December. This marks a sharp reversal in price direction after the crude hit a record high premium to Ice Brent near $5.20/bl last month as a result of higher European demand for alternatives to Russian crude supply amid the conflict in Ukraine.

At least 1.5mn b/d of WTI was sold to European buyers for loading at the US Gulf coast in the first 10 days of April, according to a market survey. That reflects a roughly 18pc month-on-month increase compared to the 1.27mn b/d of WTI loaded for Europe over the same period in March, according to Vortexa.

But higher flows have pushed freight rates to multi-year highs amid the higher demand, pressuring crude prices lower as a result of more difficult-to-work arbitrage conditions.

The Aframax rate for WTI-quality cargoes traveling from the US Gulf coast to Europe rose 84¢/bl week-on-week to $5.87/bl by the close of business yesterday, marking that rate's highest since January 2020. The WTI Suezmax rate on the same route rose by $1.07/bl over the same period to $3.63/bl yesterday, reflecting its highest since April 2020.

Market participants say they are now looking to offset higher freight rates by instead chartering very large crude carriers (VLCCs) to the Netherlands port of Rotterdam, where it can then reverse lighter into three smaller cargoes. The rate for this type of shipment has only increased 5¢/bl on the week to $1.76/bl — still reflecting the highest VLCC to Rotterdam rate for WTI cargoes since July 2020.

Additional supply

US spot crude prices are additionally drawing pressure from the recent sale of 30.225mn bl of crude from the US Strategic Petroleum Reserve (SPR) for delivery starting in May, which is currently the prompt trade month. The US Department of Energy (DOE) has already placed another 30mn bl of SPR crude on offer for delivery in May and June and plans to draw down an additional 150mn bl, or around 1mn b/d, in the five following months as part of the largest ever release of crude reserves despite logistics concerns.

Meanwhile, IEA member countries will release 60mn bl of strategic oil stocks on top of the volume from the US SPR in a coordinated effort to address price volatility resulting from the Russia-Ukraine conflict.

Earlier this year, the IEA announced a co-ordinated release of 62.7mn bl from strategic stocks, with the US accounting for half of that.

US crude benchmark prices have taken the largest hit globally since the brunt of the supply from strategic reserves will hit the domestic market first. The US Nymex light sweet crude futures contract has averaged a $2.19/bl discount to July Ice Brent — the prompt contract used to price cargoes loading in May — since the 28 March start to the May US trade month. This reflects a $3.45/bl decrease month-on-month compared to an average $1.26/bl Nymex premium to month-two Ice Brent over the same period of the April trade month.

The Nymex discount to July Ice Brent has fallen $3.82/bl since 28 March to a $4.02/bl discount yesterday, dragging along US-based spot crude prices lower against the international benchmark.

By Amanda Hilow