The other side of the mirror: Asia’s perspective on US crude exports

With over two and a half million barrels per day this year, the US ranks among the largest oil exporters in the world.

This study looks at the share of US oil exported to the top four destinations in Asia (South Korea, India, Japan, and Thailand); the structural reasons for rising imports to Asia; and how it impacts the indexation of light sweet oil in the region. The second part focuses on the WTI derivatives market during Asian hours and loops back to the US, with a closer look at the Houston export hub.

South Korea is home to some of the biggest and more complex refineries in Asia. Driven by a policy to diversify its supply from the Middle East, and helped by free trade agreements, Korea’s crude oil mix is a dynamic reflection of the market, evolving year on year in response to the price dynamics and changing sweet-sour crude oil spreads. It’s no surprise in this context that Korea has fully taken advantage of the opportunity offered by US crude.

As described in a previous paper¹, for the period January-August 2019, the US was the third largest source of crude supply for Korea.

India’s geographical proximity to Middle-Eastern producers naturally gives a strong incentive to process the medium sour barrels that are in greater supply from the region.  Further, the ability of privately-owned refiners to process heavy and acidic sour grades results in significant imports from Latin America. The bulk of light sweet crude oil traditionally comes from Nigeria.

As India’s economy grows, so does its need for oil and US grades continue to find a place in the country’s supply mix. WTI competes directly with certain Nigerian light sweet grades, such as Agbami, Akpo, and Bonny Light.

Independently from the current US-China trade war, if India’s economy keeps growing, it will need more oil and US crudes seems to be a good fit for Indian refineries.

Japan relies heavily on Middle-East crude with over 85% of all its crude oil coming from this region. Neither the recent policies to reduce this dependence nor the rationalization of Japanese refineries have changed the big picture. Only Russia managed to rank among the top five suppliers, due to the geographical proximity of ESPO’s loading port and grades produced on Sakhalin Island (Sokol, Sakhalin Blend).

With ESPO and Sakhalin Island grades currently in strong demand by Chinese independent refiners, Japan needs to look for alternative sources of light sweet oil. The heavier sweet West African grades have typically not been a suitable option (except for direct burning for power generation during the first years following Fukushima’s incident).

As a result, imports from the US have increased significantly.

Although the share of US oil remains small in the Japanese crude cocktail, it is worth noting that the quantities of WTI and Eagle Ford grades imported in the period Jan-Aug 2019 exceed all other grades priced versus the North Sea benchmark. During this period WTI was the most important light sweet grade imported by Japan.

Thailand is another example of the rising importance of US crude oil for Asian refiners. Thai supply is relatively stable with 65% coming from three Middle-East countries (UAE, Saudi Arabia and Qatar). Domestic and South East Asian light sweet crude oils from Malaysia, Indonesia, Brunei, and Vietnam are key supply sources for Thai refineries and condensate splitters.

With the decline of SE-Asian crude availability, Thailand structurally needs to look for alternative barrels, and the US has emerged as a major supplier. WTI competes with UAE Murban (API=40, Sulfur=0.7%) and Malaysian Kimanis (API=39, Sulfur=0.06%), two traditionally popular grades in Thailand.  

In the first eight months of 2019, crude imports from the US have exceeded those of the neighboring country Malaysia. Generally, Asian light sweet grades and condensate are competing against WTI, rather than North Sea crude, which over time might lead local players to reconsider the benchmark used to price these barrels.

With US crude oil becoming a major source of supply of light sweet grades for several countries in Asia, the relevance of WTI pricing is increasing. The regional Asian benchmarks for light sweet oil – Indonesian Minas and Malaysian Tapis – lost their relevance this decade due to both declining production and lack of liquidity in the derivatives market.

In contrast, the case to use WTI for pricing light sweet in APAC is backed by strong fundamentals: WTI is supported by strong production growth in the US, and its futures market is extremely liquid during Asian hours. During the first three quarter of this year, NYMEX Light Sweet (WTI) futures volume during Asian hours reached the equivalent of 235 million barrels per day on average.

WTI futures have become increasingly active on screen from Asia’s early morning. Volumes typically trade throughout the Asian day and reach around 30 million barrel per hour from 4pm Singapore time. Put in perspective, there is enough liquidity on screen during one hour in the Asian afternoon to hedge all the region’s crude oil imports.

Other instruments, like the NYMEX WTI futures Trade at Settlement (TAS) and the WTI Singapore marker are as well available to manage efficient price exposure resulting from pricing cargos on WTI in Asia².

When the market moved away from Tapis and Minas indexation, it adopted a North Sea indexation for West African cargoes, the main source of light sweet crudes at that time. US oil flows to Asia are now a growing supply source, and the impressive liquidity of WTI futures in Asian hours offers a new perspective to traders in the region.

At the same time, the transparency around pricing and quality of WTI at US Gulf Coast terminals has improved significantly with the launch of physically delivered futures contracts in the Houston area.

The NYMEX WTI Houston futures (HCL) contract was launched in November 2018. The contract is physically delivered at four Enterprise terminals, with a tight sulfur specification of 0.20% maximum, and low metals content³.

By adopting tighter specifications than those in place for US domestic pipelines, CME Group has contributed positively in building the confidence of international traders concerning US export grades. Whereas US refiners are active buyers of pipeline crude oil streams, international cargo traders are more familiar with crude assays, and consequently, CME Group’s specifications help to bridge the gap between the US pipeline and export markets.

In addition, CME Auction provides an online platform to purchase cargoes of WTI streams on an FOB basis, and is another significant step toward transparency. Since the introduction of CME Auction this year, three WTI Houston crude cargoes were sold during separate auctions. On average, 15 firms have participated in these auctions to date. More recently, Enterprise started publishing data about the quality of WTI delivered at its ECHO terminal in Houston⁴. ECHO is one of the four delivery location of the NYMEX WTI Houston futures and a key facility in the Houston area.

As the US, the current world’s largest oil producer, becomes an important source of supply to Asia, the world largest consumer, CME Group is constantly working with its clients to create complementary products reflective of the energy marketplace allowing access to a liquid trading ecosystem.  

1. US becomes South Korea key supplier: https://www.cmegroup.com/education/articles-and-reports/us-becomes-south-koreas-key-oil-supplier.html
2. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contractSpecs_futures.html
3. https://www.cmegroup.com/trading/energy/crude-oil/wti-houston-crude-oil_contract_specifications.html
4. https://www.enterpriseproducts.com/customers/wti-crude-quality-echo