U.S. Crude Floods into Asia, but It's a Short-Term Blip

Asia will import record volumes of U.S. crude oil this month, with China leading the way, but the surge is more likely a short-term blip rather than a sustained trend. 

A total of 57.7 million barrels of U.S. crude is expected to land in Asia in July, equivalent to about 1.86 million barrels per day (bpd), according to vessel-tracking and port data compiled by Refinitiv. 

This figure is subject to revision as some cargoes expected to discharge by the end of the month may be delayed, but even if the number does adjust downwards, it will still be well ahead of the next best month, which was 1.36 million bpd in October last year. 

The strong Asian imports of U.S. crude will continue in August, with an estimated 1.41 million bpd due to arrive, but thereafter the picture becomes less optimistic for U.S. exporters. 

The main reason U.S. crude exports to Asia may struggle after the current surge ends is that they have lost their price edge against similar grades from other producers. Cargoes arriving this month and next were most likely arranged in March and April, at a time when U.S. crude was cost-competitive against rival crudes. 

While April is remembered for the dramatic plunge in West Texas Intermediate (WTI) futures to a close of minus $37.63 on April 20, it's also the case that physical WTI was at a discount to competing grades priced against Brent, the global benchmark light crude. 

This encouraged Asian refiners to buy U.S. crude, especially as freight rates also weakened, meaning the disadvantage of having to ship it further wasn't as pronounced as when tanker costs are higher. Nimble-footed traders would also have been able to take advantage of the plunge in WTI futures to lock in prices at levels below prevailing physical prices, thus giving them an arbitrage opportunity. 

It appears Chinese refiners led the way in snapping up U.S. crude cargoes, with a record 34.3 million barrels, or about 1.1 million bpd, expected to arrive this month. This is more than double the previous high for Chinese imports of U.S. crude, which was 466,000 bpd in June 2018, achieved just as the trade war between Beijing and the administration of U.S. President Donald Trump was hotting up. 

China's imports from the United States are expected to remain relatively strong in August, with an estimated 600,000 bpd scheduled to arrive. But it appears they will then slump again, with only two cargoes, currently expected in September, equivalent to 88,000 bpd. 

And the window for more to be arranged is rapidly closing, given it usually takes at least seven weeks for a tanker to go from the U.S. Gulf Coast to China. PRICE DRIVER The lack of flow-through on Chinese buying of U.S. crude should put paid to any speculation that Beijing is making an effort to meet its obligations to massively increase the amount of U.S. energy it buys in terms of the so-called Phase 1 trade agreement, signed in January. 

Rather, it appears economics is the driving force, with a physical measure of WTI delivered in Houston, as assessed by commodity price reporting agency Argus, actually trading higher than physical Dated Brent for much of May and June, the time period when September cargoes would have been arranged. 

Dated Brent ended on Monday at $43.35 a barrel, while WTI Houston was at $42.35. The $1 discount won't be enough to encourage refiners in Asia to buy the U.S. grade, given higher shipping costs would make it more expensive on a delivered basis. 

It's a similar story to China in other major Asian crude importers, with India maintaining imports around the 270,000 bpd level for June, July and August, but a slump is likely in September. For South Korea, the surge in imports from the United States is coming in August, with 264,000 bpd expected to arrive, up from 177,000 bpd in both July and June. 

Overall, the numbers seem to support the view that Asia is largely an opportunistic buyer of U.S. crude, with the price differential to competing grades being the most important factor. 

(Editing by Richard Pullin)