Singapore/Seoul/New Delhi: The oil tanker Tofteviken is set to sail from the UK this month carrying the first shipment of North Sea Ekofisk crude to the US Gulf Coast in five years.
More than 7,000 miles away, the Syros Warrior is due to deliver Siberian oil to the Chinese port of Qingdao, part of a record surge of cargoes that’s helped Russia overtake Angola as the Asian nation’s second-biggest supplier. Back in Texas, a tanker of crude is scheduled to sail for China in what will be one of the first shipments to leave the US after an export ban was lifted.
These journeys illustrate how the global oil market has been upended by the collapse in prices that was triggered in 2014 by the US shale boom. They’re a reflection of the fluctuating relationship between the three global crude benchmarks being buffeted by a glut of supplies from producers determined to keep their taps open.
“Increased volatility in spreads among three benchmarks is eroding the stable relationships buyers used to maintain with sellers,” said Hong Sung Ki, a Seoul-based commodities analyst at Samsung Futures Inc. “Ultimately, this will further intensify the price war among oil producers as they compete against one another to maintain market share. When spreads fluctuate, it often changes the flow of oil trade.”
The cost of crude from around the world is typically linked to the price of regional benchmarks. West African oil, for example, gets its value from North Sea Brent, while supplies from the Middle East are linked to the Dubai grade and US crude to West Texas Intermediate. Changes in the relative value of those benchmarks therefore decide what crude goes where.
The gap between Dubai and Brent prices, reflected in a spread known as the exchange of futures for swaps or EFS, widened to as much as $4.55 a barrel on Jan. 5, making the Middle East grade the cheapest in 1 1/2 years relative to North Sea crude, data from PVM Oil Associates Ltd. show. It was as little as 60 cents in July 2015, the smallest in five years.
Middle East crude is getting cheaper compared with Brent as Iran begins to boost exports after international sanctions against it were removed and the Organisation of Petroleum Exporting Countries effectively abandoned its output limits, allowing members such as Iraq and Kuwait to pump as much as they want to defend market share.
The widening spread helps explain why China’s buying more Siberian crude, linked to Dubai, than Angolan oil, which is linked to Brent. Russia’s shipments to China, the world’s second-biggest oil consumer, jumped 28 per cent last year to 42.4 million metric tons, with December exports reaching a record, customs data from the Asian nation show.
Widening Gap
“Refiners will definitely try to take advantage of the widening gap between various benchmarks, given the availability of oil in the market,” said B.K. Namdeo, director of refineries at state-run Indian processor Hindustan Petroleum Corp. “Some will go for more Dubai-linked high sulphur, heavy grades from the Middle East as that gives a $4 to $5 per barrel advantage over Brent.”
India’s Reliance Industries Ltd., owner of the world’s biggest refining complex, is also shifting away from crude that’s priced off Brent and turning to grades marked against Dubai. It’s evaluating the “economic robustness” of various grades more frequently, it said in a presentation on its website on Jan. 19. The refiner’s profit in the three months ended Dec. 31 surged to the highest in eight years, and its “crude sourcing” was a key driver of performance, the company said.
Export Ban
In the US, the shale boom has led to the end of a 40- year-old ban on crude exports. That’s expanded the role of WTI from being only a marker for American supplies to a benchmark that traders elsewhere follow more closely to compare with supplies from other regions. Unipec, the trading arm of China Petroleum and Chemical Corp., is said to plan loading about 500,000 barrels of light, sweet crude from Corpus Christi in late February.
The Tofteviken, an Aframax class vessel that typically carries about 80,000 metric tons of crude, was booked by Phillips 66 to load on Feb. 6 from the Ekofisk terminal Teesport in the UK, two shipbroker reports show. If the tanker completes the voyage, it’ll be the first time the grade is shipped to the US Gulf Coast since December 2010, according to data compiled by Bloomberg oil-market specialist Bert Gilbert.
It’s a change in the relationship between Brent and WTI that’s making the journey a possibility. The European benchmark was as much as $12.82 a barrel more expensive in February. Since the ban on US crude exports was lifted, it was $1.45 less by Jan. 15, the cheapest since 2010.
“There’re a lot of barrels swinging around,” said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “We expect the gap between grades to remain wide and volatile, and we’ll be looking out for their impact on global trade flows. Refiners will use the spreads as a guide.”
