Higher US crude flows to Europe help shrink physical premium, boost tanker rates

Rising volumes of US crude exports to Europe as the region replaces Russian supplies are supporting dirty tanker rates and helping to lower a recent price premium for physical crude, market sources told S&P Global Commodity Insights.

US seaborne crude exports to Europe have risen by almost 300,000 b/d on average since March and are expected to hit a record 1.6 million b/d in August, according to vessel analytics provider Kpler, supported largely by rebounding volumes of US shale.

Platts, part of S&P Global Commodity Insights, assessed dirty USGC-UK continent aframaxes at $44.93/mt Aug. 23. This was down slightly from $51.01/mt Aug. 9, its highest since January 2020.

"Very strong activity out of the US Gulf has translated into higher rates for spot voyages across the board with rates out of West Africa, Brazil and Persian Gulf improving in tandem," a shipbroker said.

The number of cargoes out of the US Gulf for loading in September has increased to 36 compared to 33 for loading in August, according to ship brokerage SSY.

Platts assessed Dirty West Africa to UK Continent VLCC freight at $13.13/mt Aug. 23, down from $13.51/mt Aug. 18, which was its highest since May 2020.

In larger vessels, VLCC earnings for non-scrubber-fitted and non-eco vessels rose to over $40,000/day after nearly 20 months in which time charter equivalent rates were either negative or below fixed operating costs, shipbrokers Gibson's said in a note Aug. 19.

Global VLCC export volumes have risen consistently since June and fixture volumes from the US Gulf and West Africa have trended higher over the past two months, Gibson's said.

Physical-paper disconnect

The US-Europe shipments have also helped improve the supply of crude in Europe, where tight physical crude markets and worsening concerns of a global recession have been blamed for decoupling physical and paper markets in recent months.

Saudi energy minister Prince Abdulaziz bin Salman on Aug. 22 blamed "unsubstantiated stories about demand destruction and recurring news about the return of large volumes of supply" for a disconnect between physical and futures oil prices that was sending "erroneous signals" to markets.

Rising alternatives to Russian crude from the US, Iraq, Libya, Norway and other exporters into Europe in recent weeks appear to have removed this disconnect.

After trading at an average premium of $7/b to ICE Brent front-month futures during June and July, the Platts Dated Brent physical crude benchmark returned to parity Aug. 18 and has remained close since, according to data from S&P Global.

"We think the market has begun to price in less of a risk premium, and this is seen both in paper markets and in physical markets with many differentials narrowing off their highs," Anthony Starkey, senior advisor, trade flow and modeling, pricing and trade flow at Platts Analytics said, adding that the paper and physical markets are currently largely aligned.

Headwinds ahead

US global crude exports could rise further in the coming months, according to Platts Analytics, helping to ease any near-term supply concerns.

"The last two weeks have seen very strong US exports," Starkey said. Volumes during the current and previous week were above 4 million b/d, he said. This was up from 3.6 million b/d of US crude exports in July, Starkey added.

The sustainability of higher tanker rates remains questionable, however, as signs of softening demand and recession fears mount, Anastasia Zania, shipping analyst at Platts Analytics said.

China remains a wildcard but Europe's appetite for alternatives to the Russian supplies is here to stay along with trade flow changes, as already seen with increased US and West African crude heading to the continent on VLCCs cannibalizing, to some extent, the smaller vessels' market share, Zania said.