The volumes traded were fairly modest last year, as almost nothing was shipped to Asia during the first half of the year. Shipments rose slightly to around 60,000 barrels per day during the second half of 2016, Gibson Research said in a recent report.
This was largely expected considering the decline in US crude production for most of 2016, which fell by over 0.5 million barrels per day year-on-year. This not only limited the scope for the increases in total US crude exports (which were up modestly by just 55,000 barrels per day, including those barrels to the East) but also translated into higher crude imports, which registered much stronger gains.
In addition, shipping US crude to Asia is a relatively high cost exercise and there are also infrastructure limitations. US crude is largely exported on Aframaxes and Suezmaxes, while VLCC loading (practical for long haul) involves an expensive reverse lightening exercise.
AIS tracking data showed that just four VLCCs shipped US crude to Asia in 2016, all in the second half of the year. The dynamics of the market have changed this year. US crude production has started to bounce back and is forecast to continue to grow. At the same time, massive Middle East OPEC cutbacks have limited regional crude availability, translating into higher values for the Middle Eastern barrels relative to the Atlantic Basin benchmarks.
The price differential between DME Oman and WTI crude futures moved from an average discount of around $1.4 per barrel in 2016 for DME Oman to a premium of around $1.5 per barrel so far this year. These developments have stimulated US crude exports to a number of destinations, including higher demand from Asian refiners, Gibson said.
Preliminary weekly US data suggested that total crude exports averaged around 0.77 mill barrels per day thus far in 2017, up by 350,000 barrels per day against the same period last year.
AIS tracking data also showed a notable increase in shipments to Asia, with three VLCC loadings in January, five loadings in February and another five in March. Whilst Middle East OPEC production cuts remain in place, this is likely to support robust demand from Asian refiners for US crude. However, as this trade is primarily arbitrage driven, greater availability of the Middle Eastern barrels is likely to make US crude less appealing, particularly if prices for the Middle East grades decline relative to the Atlantic Basin crudes.
In the medium term, the picture may change again, as prospects are strong for continued gains in US crude production. Some may argue this is likely to reduce seaborne crude imports. However, increases in US crude exports will alleviate the downward pressure on imports. The case for further growth in exports is also supported by the fact that US refiners are more geared up to run on heavier imported crude versus light sweet domestic grades.
Crude export pipeline infrastructure to the US Gulf increased towards the end of 2016 and further projects are expected to be completed during the next few years, paving the way for further growth in export volumes. However, reverse lightening is expensive and can add up to 15-25% to the overall cost of freight for a VLCC cargo.
To make US crude more attractive to Asian buyers, economies of scale are needed - ie, efficient VLCC shipments. Last year, plans were evaluated to transform LOOP into a crude export facility but the infrastructure is not in place as yet. If there is strong demand, sooner or later progress is likely to be made, thus opening the door for strong gains in the longest haul trade from US to Asia for crude tankers.