US oil exports to Asia set to rise in Q2 as freight costs fall

SINGAPORE/NEW YORK: US crude oil exports to Asia are set to rise in the second quarter as sellers cut prices following sharp drops in freight rates and expected weaker demand in the United States, trading and shipping sources said.

Offers for U.S. crude arriving in Asia in the second-half of March or April are about 50 cents a barrel lower than a month earlier, they said, making it more competitive against oil from the Middle East.

U.S. crude grades popular with Asian buyers include light oils such as West Texas Intermediate (WTI) Midland and Eagle Ford, as well as Mars and Southern Green Canyon among heavier grades.

The United States has boosted crude sales to Asia, helped by a steep discount for U.S. oil to the global benchmark Brent.

"There is the potential for Q2 U.S. crude exports to Asia to be higher year-on-year if the WTI/Brent spread remains in the range it has in recent months and with the lower freight rates," said David Arno, oil analyst at analytics firm Genscape.

"There are a few variables, though, with the ongoing U.S-China trade war and the potential for the waivers for Iranian crude exports to Asian countries to not be extended."

A U.S. decision not to extend waivers allowing some Asian countries to import Iranian oil despite sanctions would boost demand from South Korea, Taiwan, Japan, China, and India.

FREIGHT RATES FALL

The rate for chartering a Very Large Crude Carrier, to ship 2 million barrels of oil from the Louisiana Offshore Oil Port (LOOP) in Houston to Singapore has fallen more than 40 percent from late-October to about $5 million, data on Refinitiv's Eikon shows.

VLCC prices spiked late last year during the winter season and as buyers boosted imports ahead of renewed Iran sanctions.

Enquiries for ships to send oil from the U.S. Gulf coast or South America to Asia have picked up, while West Texas Intermediate (WTI) at Houston - also known as MEH - and Mars are seeing strong demand from Asia, U.S.-based trade sources said.

Companies looking for ships include P66, Mercuria, Reliance and Vitol while Royal Dutch Shell  has a VLCC on the way to Asia, said one source.

More U.S. crude could also be freed up for exports as U.S. refineries prepare to shut for seasonal maintenance from February before ramping up for the summer driving season, the sources said.

In Asia, offers of WTI Midland crude for delivery to North Asia have fallen by 50 cents a barrel to about a $2.50 a barrel premium to the Dubai benchmark, while Eagle Ford crude can be delivered to Asia at about $3 a barrel premium, the sources said. U.S. Mars crude has become cheaper than Oman on delivery, they said.

The U.S. price cuts have also depressed spot prices for Middle East grades such as Murban and Oman, the sources said.

CHINA UNCERTAINTY

While demand from big U.S. oil importers - South Korea and Taiwan - is expected to remain strong, Chinese buyers are likely to stay cautious amid trade talks with the United States.

"Right now, we see one cargo headed for China, which set sail on Dec. 31 and is set to land in mid-February. It marked the first U.S. crude export to China since late September, and only the second one since late July," Genscape's Arno said.

Two VLCCs that loaded U.S. crude in December had been scheduled to head to China, shipping data on Refinitiv Eikon showed. But VLCC Nasiriyah is now heading to Rotterdam and VLCC Manifa is set for Singapore, Refinitiv analyst Emma Li said.