US crude share intact in Asia but flows witness dramatic shifts

The Russia-Ukraine conflict has not only shifted Asia's Russian sweet and sour crude flows, but also changed US crude trade dynamics in the region, with Taiwan displacing India as one of the region's top three North American light sweet crude customers.

The market share of US crude oil in Asia reached a record high of 7% in Q2 this year compared with the average of 5.8% last year. China, South Korea, and Taiwan emerged as the top three US crude importers in Asia in that quarter, with volumes rising by 201%, 50% and 92% on the year, respectively, according to S&P Global Commodity Insights.

The US' share in India's crude import basket has eased this year, leaving ample room for WTI Midland crude to head to South Korean, as well as Taiwanese, Chinese and Thai refiners, according to feedstock managers at major Northeast and Southeast Asian refiners.

"Looking into H2, we anticipate Asian crude buyers to continue their efforts to diversify crude purchases from Russia and the US in the wake of tightened supply from the Middle East," said Wang Zhuwei, Asia oil analytics manager at S&P Global.

US crude exports to India averaged around 420,000 b/d in 2021, placing the South Asian nation as the top North American crude customer in the year, taking in more than South Korea's 330,000 b/d in US crude purchases, according to data from the US Energy Information Administration and Korea National Oil Corp.

In 2022, however, US crude shipments to India fell to 320,000 b/d and South Korea reclaimed its status as the top Asian customer by taking 380,000 b/d, EIA and KNOC data showed.

As state-run Indian refiners started to aggressively purchase attractively-priced Russian crude, especially medium sour Urals, since the late third quarter of 2022, Indian traders rapidly diverted away from light sweet US grades with US crude shipments to Asia's second-biggest oil consuming nation more than halving from last year at 172,500 b/d so far this year.

India's plentiful purchases of Russian crude is one of the reasons for supply from the non-OPEC supplier expanding its share in Asia in a big way.

"Russia's crude oil market share in Asia also elevated to a record high of 15.6% in Q2 versus an average of 10.7% in 2022. In comparison, the crude markets of Africa, Latin America, Northwest Europe and the Mediterranean regions slightly shrank due to less arbitrage incentives from the West amid high freight rates," Wang said.

The Taiwan surprise

Taiwan has stepped up its North American crude arbitrage trade in recent months to fill India's US crude demand gap, taking more than five VLCCs, or 10 million barrels, in May, marking the highest monthly imports from the North American supplier in over five years.

Taiwan is currently Asia's third-biggest US crude importer with purchases of 250,000 b/d of US crude to date in 2023, up 39% from 180,000 b/d received in 2022, according to data from the Ministry of Economic Affairs' Bureau of Energy.

Thailand also played its part in filling India's US crude demand gap as it has taken 100,000 b/d from the North American producer to date in 2023, more than double 47,000 b/d received in 2022, showed data from Thai customs.

South Korea, meanwhile, is on track to remain Asia's top US crude customer in 2023 as the world's fourth-biggest crude importer purchased 385,000 b/d of light sweet US grades in the first five months, compared with 374,000 b/d in 2022, showed data from state-run Korea National Oil Corp.

Unlike India, South Korea, Taiwan and Thailand have little to no interest in Russian crude as refiners prefer to avoid trade, logistical, legal and financial complications and maintain a good corporate reputation, S&P Global reported earlier.

"Other Asian buyers like Taiwan and Thailand have been stepping up their US crude purchases amid expensive Saudi and other Middle Eastern crude official selling prices and the recent sharp downtrend in the Brent-Dubai price spread," said a feedstock trading and logistics management source at a South Korean refiner that operates in Ulsan.

Market impact

With the spread between the European benchmark Brent and the Asia-Middle East marker Dubai hovering around two-year lows, refiners across Northeast and Southeast Asia have started to notice arbitrage economics for light sweet North American barrels improving significantly since late Q1.

The Brent-Dubai spread has narrowed so much in recent weeks that US crude spot cargoes that are typically offered on Platts Dated Brent basis look extremely attractive, said traders based in Singapore and Hong Kong and feedstock management sources at four major refiners in Taiwan, Thailand and South Korea.

In an effort to take full advantage of the narrow Brent-Dubai price spread and attractive US-Asia arbitrage trade economics, Thailand would like to take up to two VLCCs/month, or around 4 million barrels/month, of US crude if possible, a feedstock management source at a state-run Thai refiner said.

Taiwan's oil companies CPC and Formosa combined are confident of securing around 5 million barrels/month of US crude but the country is aiming to take as much as South Korea if possible, sources with knowledge of US-Taiwan trade flows told S&P Global.

South Korean refiners, meanwhile, indicated that the country would continue to aim for at least 10 million barrels/month of US crude.

The Brent/Dubai Exchange of Futures for Swaps, or EFS spread, a key indicator of Brent's premium to the Middle Eastern benchmark, has averaged $1.64/b in Q2, narrower than $3.40/b in Q1 and $6.80/b in Q4 2022. The EFS flipped to negative at minus 14 cents/b on June 28, marking the lowest spread since minus 22 cents/b on Oct. 20, 2020, showed S&P Global data.

A weaker EFS makes various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark more economical compared with Dubai-linked grades.