Shrinking Arbitrage: US Crude Shipments to Asia Face Economic Headwinds
The arbitrage window for American crude oil shipments to Asia is narrowing, primarily due to increasing tanker rates and more competitive Middle Eastern oil prices. The higher costs are making U.S. crude less attractive to Asian buyers, potentially disrupting established trade routes.
Rising Tanker Rates Squeeze Margins
The cost of chartering very large crude carriers (VLCCs) from the U.S. Gulf Coast to Asia has significantly increased. Data from the Baltic Exchange, as reported by Bloomberg, indicates rates have surged to around $70,000 per day. While rates from the Middle East to China are even higher, ranging from $90,000 to $100,000 per day in some instances, the shorter voyage time from the Middle East offers a considerable cost advantage.
According to Reuters, the additional cost of transporting crude from the U.S. Gulf Coast to Asia has reached $1.75 per barrel. A trading source cited by Reuters stated, "That alone would close the arb."
OPEC's Influence and Tanker Availability
Ed Finley-Richardson, shipping analyst and founder of Contango Research, noted, "With OPEC unwinding their quotas, we are seeing more cargoes in the East of the Suez." This has made tanker owners "optimistic about their prospects there, and so prefer to remain in the East," according to Finley-Richardson.
Competition from Middle Eastern Crude
Simultaneously, Middle Eastern benchmarks like Dubai, Oman, and Murban are becoming more competitive. The premiums of these benchmarks over Brent Crude have decreased. For instance, the premium of Murban over Brent futures fell from $3.84 per barrel on September 12 to $1.63 a barrel on September 26, based on exchange data cited by Bloomberg.
Impact on Trade Flows
The narrowing arbitrage window is already impacting trade flows. According to Kpler, U.S. oil exports to Asia are expected to increase in September, with key buyers being South Korea and India. Reuters reported that the average export rate for September is expected to be approximately 1.35 million barrels daily, but this could increase further as more cargoes are loaded. Cnergyico in Pakistan and Vietnam are also importing U.S. crude.
June Goh from Sparta Commodities anticipates a potential easing of freight rates, which could reopen the arbitrage window. "With only marginal WTI support and average supply, rates are likely to retrace lower and therefore improving WTI competitiveness," she told Reuters.
WTI Premium and Freight Costs
The surge in freight rates has also increased the spot premiums for WTI at East Houston, also known as MEH, to $1.60 a barrel, which is its highest level since February, according to trade sources. Offers for 2 million barrels of WTI for delivery to Asia in December were at about $4.50 to $5 a barrel above dated Brent, one trader in Singapore noted. In comparison, November-loading Murban crude could land in Asia in December at about $5 a barrel above Dubai quotes, another trader said. LSEG data showed that Very Large Crude Carrier rates jumped to 12.5 million last week, which was the highest since March 2023.
