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S&P Commodity Insights — 21 May, 2020

US-Northwest Europe crude oil export route attracts interest despite closed arbitrage

Highlights

A recent drop in Americas Aframax freight rates has sparked charterer inquiry and fixing activity for the US Gulf Coast-UK Continent/Mediterranean route, despite closed oil arbitrage economics that has plagued the market since the end of April.

Assessed at $27/mt, Friday, freight rates last week hovered slightly above lows seen following a Worldscale w80 drop from April 27 to May 4. Despite this decline, the arbitrage to ship US crudes to Northwest Europe was considered unsupportive, while the incentive to ship to Asia appeared to be “opening up nicely.”

Delivered costs and final refined value yields suggest unfavorable conditions for barrels unloaded at ports associated with Western European refinery systems. WTI Midland delivered to Rotterdam for June arrival was heard indicated Monday at July Dated Brent plus $1.70/b and was heard bid flat to July Dated Brent.

According to S&P Global Platts Analytics, the value yields of refined Forties crude over WTI from the Magellan East Houston terminal and imported in Rotterdam were an estimated $3.85/b based on last Friday’s values, having averaged $5.15/b so far in May.

Though it appears sourcing more local Brent basket grades for local refining is a sound option, the European crude import market still faces the global oil glut resulting from the coronavirus pandemic. Final refined values of Nigerian Bonny light were estimated on average to have yielded $1.69/b more than Forties Blend so far in May Friday, data from Platts Analytics shows.

Aframax fixing activity firm

In spite of the disincentive found in oil economics, Platts fixture logs show that within the first two weeks of May, at least 16 Aframaxes were placed on subjects on the USGC-transatlantic run. Phillips 66, Mercuria, BP, Vitol, Shell, Mitsui, Resources Marine and Trafigura were among the charterers showing interest in such movements.

“The arbitrage and prices alone do not support the moves seen to Europe,” an Aframax shipowner commented Friday. “Plenty of what is being moved goes into storage,” he added.

Sources believed activity dominated by term and refinery system barrels is what powers the moves to NWE in spite of the disincentive. “Sometimes it just has to move whether that’s contract based, restrictions in the Gulf terminals or you’re moving internally to your own refineries over there,” a shipbroker said Friday.

Looking forward into the second half of May, an extensive list of Aframaxes scheduled to open up in the region has left brokers and owners alike expecting freight rates to trend down further. At least 40 Aframaxes were heard opening on the USGC between May 18 and June 2, about half of them oil company relets.

Even with flow to major importers of US crude down in recent weeks, US crude exports were over 1 million b/d stronger at over 4 million b/d for the week ended May 15, estimates from cFlow, Platts trade-flow software showed.