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Asian refiners are hopeful that US President-elect Donald Trump’s policies might boost US crude production and back out imports, leading to an increase in available crude supply halfway around the world. But, sources say, US crudes will remain an arbitrage choice and how much of it comes to Asia will depend on economics.
Trump will not be able to directly influence the volume of US crude exports during his administration but policies that stimulate US oil production or help move more crude to Gulf Coast refiners and terminals, for example, could play an indirect role in boosting exports.
«To some extent, [we] can expect the new Trump government to support US producers to pump more, sell more, export more to Asia,» an Asian crude trader said.
«But honestly, no matter how much government backing they [US producers] get, US crudes will remain just one of many arbitrage choices for Asia — they are not going to become a regular import option,» the trader said, referring to the complexity of economics of different crude benchmarks, delivery timing and freight rates.
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Trump has said he wants to open more federal lands to drilling, roll back environmental regulations on industry and approve major infrastructure projects — all of which could increase production. He is expected to quickly approve the 470,000 b/d Dakota Access Pipeline that will move Bakken light crude from North Dakota to Illinois before linking with another pipeline to Texas.
Trump has also encouraged TransCanada to refile its application for the dormant Keystone XL project, which proposed carrying 700,000 b/d of diluted bitumen from Alberta to Nebraska, then linking with a since-built pipeline to the Texas Gulf Coast.
ECONOMICS KEY FOR US CRUDE IMPORTS
Even if Trump spurs domestic production and new pipeline capacity, the level of exports will still depend on global price and supply dynamics.
For East Asian crude importers, this comparison would involve procuring Mideast crude on VLCCs for about a 25-day voyage to East Asia, compared with transporting US oil on Suezmax tankers or VLCCs, possibly co-loading Latin American crudes, for some 40 to 50 days shipping.
Asia has proved to be a destination for US oil, including from Alaska, so far this year whenever arbitrage windows open and economics make sense.
A number of tankers carrying oil from the US Gulf Coast are heading into Asia for deliveries over November-December, according to shipping fixtures seen by S&P Global Platts.
Some Asian refiners are closely looking at economics to see whether to take more barrels in coming months, market sources said.
Over January-September, China imported a total of 3.56 million barrels of US crude and condensate, a near eight-fold increase from the 457,544 barrels imported a year ago, and Japanese imports of US crude and condensate also more than tripled year on year to 3.25 million barrels in the same period from 975,171 barrels in the first nine months of 2015.
While US crude exports to Asia have been sporadic, they have climbed since the Obama administration lifted restrictions on US crude exports last December.
Most recently, US Census data showed 99,000 b/d of crude exported from the US Gulf Coast to Singapore in September.
The USGC also exported 59,000 b/d of crude to South Korea in September, and 8,000 b/d to Thailand.
The persistence of WTI being at a premium to Dubai crude continued to negatively arbitrage economics, a trading source said.
Front-month WTI assessed in Singapore averaged at an 84 cents/b premium to front-month Dubai in August, narrowing from a $2.55/b premium in July.
The premium widened out to average at $1.71/b in September, and so far in November is averaging $1.86/b.
In contrast in 2015 the same spread saw WTI average a $2.23/b discount to front month Dubai at Singapore close.
A contango structure across the crude markets encourages traders to look at options including floating storage and longer haul crude voyages to try and take advantage of the higher prices further forward.
TransCanada has said it may consider applying to build its Keystone XL pipeline.
If the company has enough shipper interest, and the line is built, that would bring even more Canadian crude to the USGC.
The Canadian crude could be exported, or USGC refiners could continue to displace comparable waterborne crudes from Mexico and Venezuela, which could benefit Asian refiners.
USGC refiners imported 562,000 b/d of Mexican crude in August, down from 1.15 million b/d in August 2011, US Energy Information Administration data shows.
Over the same period, USGC refiners have boosted crude imports from Canada to 386,000 b/d from 145,000 b/d.
US Atlantic Coast refiners have been increasingly importing waterborne crudes from West Africa this year, as the WTI discount to Brent has narrowed. But in 2014 and 2015 USAC refiners were turning away West African barrels, and other Brent-priced crudes, in favor of Bakken crude railed from North Dakota.
Those backed out imports created some competition for the typical sellers of crude to Asian refiners, pulling prices lower.
The benefits can be seen in Asian refining margins. The Singapore Arab Light cracking margin averaged minus $2.11/b in 2013, but has since risen to average $5.23/b in 2015 and $5.03/b so far in 2016, Platts data shows.
The economics of railing Bakken crude to the USAC have improved over the past two months, which may back out some waterborne imports again.
This will likely be short-lived, unless the costs of moving Bakken can be brought down in the long run.
While Bakken production has slipped below 1 million b/d because of low oil prices, Permian crude production in West Texas has climbed on improved fracking technologies and lower extraction costs.
The Wolfcamp shale formation in Texas’ Permian Basin contains an estimated 20 billion barrels of crude oil, almost three times as much oil estimated to be in the Bakken-Three Forks formation, the US Geological Survey said Tuesday.
While OPEC members will meet November 30 in Vienna to continue discussion on a production freeze and oil market stabilization, market watchers noted that any such freeze and subsequent rise in outright prices could lead to even higher US shale crude production.
–Takeo Kumagai, takeo.kumagai@spglobal.com
–Daniel Colover, daniel.colover@spglobal.com
–Gawoon Philip Vahn, philip.vahn@spglobal.com
–Meghan Gordon, meghan.gordon@spglobal.com
–Edited by Maurice Geller, maurice.geller@spglobal.com
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