Analysis: China to emerge as major US crude buyer

US crude exports could triple in the next four years on the back of rising production, with Asia-Pacific buyers potentially absorbing half of the supplies by 2021, delegates and speakers at an Argus US crude export forum in Singapore said.

Most of the exports are likely to come from the US Gulf coast (USGC). US exports in January totalled around 746,000 b/d, more than double levels of 364,000 b/d in January 2016, US government data show.

China took 65,000 b/d of US crude in January and is positioned to emerge as one of the main destinations for the new export flows, as the rise in the country's refining capacity prompts buyers to diversify their supply sources.

Chinese refiners plan to add nearly 2mn b/d of capacity from 2016-20. China will have more than 12pc of global refining capacity by 2020, increasing its crude import requirements, which may include US supplies, said Chen Bo, president of Chinese state-controlled trading firm Unipec.

Unipec, the trading arm of China's top refiner Sinopec, has bought about 9mn bl (100,000 b/d) of US crude in January-March this year. Its quarterly purchases of US crude for the rest of this year could match or potentially be higher than what it has taken in the first quarter, Chen told Argus on the sidelines of the forum.

Light US crude may not be suitable for many refiners in Asia-Pacific, but Unipec has no problems with lighter grades as Sinopec has a large refining system and can easily blend US crude with other grades that it buys. Unipec has storage facilities in the Caribbean, which are only for crude and currently can hold more than 10mn bl. Its Caribbean storage capacity could rise to 30mn bl in total for crude and products in the next 2-3 years, Chen said.

The US has typically exported medium sour grades including Mars and Southern Green Canyon (SGC), but exports over the next few years will probably include more light grades to reflect the share of shale oil in rising US production, speakers at the forum said. Asia-Pacific refiners, including in China and Japan, have made rare purchases of Mars and SGC cargoes, but the arbitrage for these grades to go to Asia-Pacific was likely feasible only as a result of lower US domestic demand because of refinery maintenance.

Export flows of these medium sour US grades could be limited in the near future because of some tightness in global supplies of heavier crude grades following the agreement between Opec and non-Opec producers to cut output.

Limited export infrastructure is still posing some challenges for US crude flows to Asia-Pacific. It could be more economic to bring a 2mn bl very large crude carrier (VLCC) of US crude to Asia-Pacific, but loading such a vessel in the USGC would mean buying 3-4 Aframax cargoes to fill the VLCC, potentially from different sellers and with different loading times. This could prolong the loading process and lead to demurrage costs.

Many Asia-Pacific buyers are also reluctant to take an entire VLCC of US light crude such as WTI, meaning the seller may have to break bulk and deliver smaller parcels to different buyers, adding to costs. Many Asia-Pacific refineries were built to run mainly medium grades with gravity of about 30-35°API, while US crude exports are lighter with about 40-45°API, resulting in some demand limitations or potentially a need for blending.

And US cargoes tend to trade promptly, with end-April to early-May loading cargoes traded at the end of March. Shipping times from the USGC to southeast Asia are about 45 days, rising to 60 days to northeast Asia, so these cargoes would arrive in China or Japan in late June. Asian refiners typically cover their requirements two months in advance, so they would need to plan ahead if they intend to buy US crude.