OREANDA-NEWS. The decision by Opec and its non-Opec partners to extend their output cut deal by another nine months to the end of 2018 will attract more US crude to Asia-Pacific in the coming year, especially medium sour US grades.

Opec's Mideast Gulf members produce predominantly medium and heavy sour crudes. The production cut extension will tighten Asia-Pacific supplies of these grades, prompting refiners to look elsewhere.

The lifting of the US crude export ban in 2015 opened up new markets for US sellers, but the Opec and non-Opec agreement in December 2016 to reduce oil production by about 1.8mn b/d has proved almost as important in boosting US crude exports. And Asia-Pacific is becoming an increasingly popular outlet. The US exported about 1.7mn b/d of crude in October, nearly 40pc of which went to Asia-Pacific. China was the top destination with about 448,000 b/d. By contrast, US exports averaged only about 520,000 b/d in 2016, with Canada receiving about 300,000 b/d.

Light sweet WTI has been the main US grade shipped to Asia-Pacific, but medium sour crudes such as Mars, Poseidon and Southern Green Canyon (SGC) have also moved to the region as refiners seek to cover the loss of medium sour crude supply from Opec.

New infrastructure cuts costs

The economics of US shipments to Asia-Pacific could improve after very large crude carrier (VLCC) loading capacity is opened at the Louisiana Offshore Oil Port (Loop) in 2018. Loop will load mainly Mars and Poseidon, production of which will rise by around 300,000 b/d next year. The ability to load a VLCC at the coast, rather than accumulating a 2mn bl cargo offshore or shipping crude on smaller Aframax or Suezmax vessels, will reduce transport costs by around $1/bl, according to Unipec, the trading arm of China's biggest refiner state-controlled Sinopec.

New instruments are also being made available to help Asia-Pacific buyers hedge their US crude deals. US exchange Nymex has listed a WTI versus Dubai crude futures contract on CME Globex electronic platform, cleared through CME Clearport. The contract launched on 18 December, with January as the first listed month.

The introduction of the contract is a response to requests from the energy industry. There has been growing interest from Asia-Pacific refiners, which see prospects for increased US crude flows to the region and need hedging instruments that could link WTI — the crude benchmark in the US — with Dubai crude, the leading benchmark in Asia-Pacific, says Nicolas Dupuis, senior director of energy products at CME, which owns Nymex.

The new contract will allow market participants that are involved in sending US crude to Asia-Pacific to manage their price exposure using the liquidity that already exists on the Nymex WTI futures contract, Dupuis says. And while significant trade volumes on the WTI-Dubai crude futures contract may initially come from companies in Asia-Pacific, enquiries have also emerged from US energy firms, which Dupuis expects to be involved in trading the contract as they hedge their US crude sales to Asian customers.

China drives demand

China is likely to remain the biggest Asia-Pacific buyer of US crude in 2018, with Unipec aiming to lift its imports from the country to 200,000 b/d in 2018, after taking at least 110,000 b/d in 2017. Unipec has concentrated mainly on WTI, but has also bought sour cargoes including Mars.

Other Asia-Pacific refiners have turned to Mars crude, in part to diversify away from Mideast Gulf suppliers. Japan took its first Mars delivery in September, after refiner JXTG Nippon Oil & Energy bought 1mn bl of the crude from US trading firm Koch a month earlier.

Indian state-controlled refiners IOC, Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) and Bharat-Oman Refineries (Borl) together bought about 5mn bl of Mars through tenders for arrival between September and December. BPCL also bought about 500,000 bl of Poseidon for September-October delivery.

Mars, with 29.6°API and 1.81pc sulphur, is similar in quality to Mideast Gulf Oman and Dubai crude. It is also close to Saudi Arab Light, Abu Dhabi Upper Zakum and Qatar Marine.

SGC, with 28.5°API and 2.14pc sulphur, has also found Asia-Pacific buyers. JX Nippon Oil & Energy and fellow Japanese refiner Cosmo Oil bought SGC in the first quarter of 2017, while South Korea's Hyundai Oil took two SGC cargoes for arrival in early May and in June. Chinese independent refiners SDP DongMing and Wonfull have taken a few cargoes of Mars and SGC the past year. And India's MRPL in December became the first of the country's state-controlled refiner to buy SGC.

Relatively low prices of US crude, coupled with strength in Dubai crude as the Opec cuts took effect around mid-2017, opened the arbitrage for medium sour US grades to Asia-Pacific.

Argus in June launched outright prices for US crude grades WTI Houston, WTI Midland, LLS (Light Louisiana Sweet) and Mars, with a 4.30pm Singapore timestamp. Argus also started publishing differentials between the Asia timestamp price for these US crude markers and Mideast Gulf Dubai swaps.

The value of Mars at 4.30pm Singapore time was at about a $3/bl discount to Dubai swaps in late June, Argus data showed. The Mars-Dubai spread has since strengthened, with Mars valued at a $1.34/bl discount to Dubai swaps at the Asian timestamp on 21 December. But expectations of lower Mideast Gulf crude supplies to Asia-Pacific in 2018 following the extension of the Opec output cuts are likely to underpin prices of Dubai-linked crude and make the arbitrage feasible again.

Abu Dhabi's state-owned Adnoc will cut nominations for its crude to honour its commitment to the Opec production restraint deal. January 2018 term exports for Adnoc's medium sour Upper Zakum will be trimmed by 15pc, following a 5pc cut for December volumes. Adnoc has been raising prices for its crude, which goes mainly to Asia-Pacific. The latest retroactive November Upper Zakum official price was the equivalent of a 93?/bl premium to Dubai, the highest level since February 2014.

Saudi Arabia cut crude exports in November and December and plans to reduce January crude supplies to Asia-Pacific by over 100,000 b/d below levels a month earlier. The country's state-owned oil firm Saudi Aramco set its January 2018 official formula price for Arab Light crude at a premium of $1.65/bl to benchmarks Oman/Dubai, the highest since September 2014.