- First VLCC loaded to carry crude oil to China, as U.S. becomes a leading crude oil exporter.
- But the trade has become uneconomical.
- Sixty-percent of the rise in crude exports is due to China.
- Lower crude exports in the weeks ahead could support crude stock build, undermining oil prices.
On Sunday, February 18, the first Very Large Crude Carrier (VLCC) loaded with U.S. crude oil set sail for Asia from the Louisiana Offshore Oil Port (LOOP). The trade was arranged during January.
VLCC’s carry about two million barrels of oil and are much more economic than smaller tankers. In the past, VLCC’s left the LOOP empty after discharging crude in the GOM.
Image Courtesy: Shipspotting/Lappino
This past July the LOOP sought customer interest in loading services, modifying its facilities to allow the port to operate “bi-directionally” to handle exports. Infrastructure logistics had been the biggest constraint in enabling U.S. crude exports to rise. Trading houses, pipeline owners and ports are reportedly investing in new infrastructure to increase shipments of American crude. These investments are likely to optimize the flows of imports and exports, lowering shipping costs.
But there may be a lull before the next supertanker loads at the LOOP, destined for Asia. The price of the Middle East Dubai marker fell below WTI. The strength of WTI v. Dubai does not justify sending U.S. crude to Asia. Saudi Aramco recently considered exporting crude from its U.S.-based Motiva unit, and concluded the trade is uneconomical. Saudi Arabia also reportedly cut its March exports to less than 7 million bpd due to seasonally soft demand.
The contraction in the spread between the OPEC Reference Basket (ORB) and WTI has become significant. From mid-September through mid-January, it averaged almost $4/b. In the past week, it averaged just $0.60/bbl. The ORB is heavily weighted for crude sales to Asia and is therefore a valuable indicator of relative prices, and 60% of the gain in U.S. crude exports during 2017 were destined for China.
Energy Select SPDR ETF (NYSEARCA:NYSEARCA:XLE) fell 2.3% today and plunged 10.8% in February, its worst monthly performance since December 2015. If crude exports drop as I expect, larger crude oil stock builds are likely for March. That, in turn, is likely to pull the rug out from under the long-only oil bulls. I will re-enter the market from the long side once the fundamentals are more favorable.
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