Drilling rigs in the U.S. (Justin Hamel/Bloomberg)
Key Takeaways:
- Overseas refiners increased purchases of U.S. crude after attacks in the Red Sea and Black Sea disruptions heightened global supply concerns.
- Strong demand lifted Gulf Coast WTI to a roughly $5 premium over Brent as shrinking U.S. inventories underscored America’s role as a key supplier.
- New export deals could boost U.S. crude shipments, though analysts said Kazakhstan’s disruptions may be temporary and demand could ease.
U.S. crude is drawing overseas interest from Asian and European refiners as supply concerns spread from the Middle East to the Black Sea.
Attacks on two Saudi oil tankers by Iran-backed Houthi rebels in the Red Sea has added a new layer of volatility to the Iran conflict, sending Brent crude above the $100-a-barrel mark. Meanwhile, Kazakhstan reduced production after Ukrainian drone attacks on Black Sea shipping, prompting buyers to seek out similar oil grades that include supplies from the Permian Basin.
South Korean refiner GS Caltex and India’s state-owned Bharat Petroleum Corp. bought U.S. oil at premiums this week, with the barrels scheduled to be loaded in August, according to traders. In an unusual move, some cargoes will be shipped on smaller vessels that can take a quicker route though the Panama Canal and the Pacific Ocean, rather than via the Atlantic, they added.
Elevated overseas demand is set to have domestic repercussions in the U.S. A full-fledged return to breakneck exports would ultimately increase pump prices for consumers and aggravate inflation in the run-up to midterm elections.
On July 23, West Texas Intermediate oil for September loading flipped to a premium of about $5 a barrel to the global benchmark Brent along the U.S. Gulf Coast, according to traders. That compares with a $2 discount a day earlier.
Despite the price increase, global interest for seaborne U.S. crude is likely to remain robust, especially from Asia. The price of a key competing regional grade — Abu Dhabi’s Murban — has disproportionately surged. Murban, which doesn’t require passage through the Strait of Hormuz to collect, was last at nearly a $13 a barrel premium over WTI, compared with a recent discount.
In a classic sign of surging price volatility, ExxonMobil Holdings Corp and oil trader Petroineos withdrew bids for WTI Midland at premiums of $6.75 a barrel and $6.55, respectively, in the European market.
U.S. crude has been in high demand since the U.S. and Israel initiated the Iran conflict in late February because it’s nowhere near the war zone. In May, American oil exports surged to a record 5.66 million barrels a day, data from Kpler Ltd. showed, underscoring the nation’s role as supplier of last resort.
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Such outbound shipments have eased recently after the brief reopening of Hormuz allowed tankers trapped in the Persian Gulf to sail to Europe and Asia, although they may yet rise again as new deals are struck.
The production curbs in Kazakhstan, a traditional supplier to refiners in the Mediterranean and Northwest Europe, has made WTI more competitive in those regions, according to Sparta Commodities. The disruption, however, is likely temporary, meaning that the pull of U.S. barrels could be short-lived.
The uptick in demand comes amid dwindling U.S. crude inventories. U.S. commercial oil stockpiles are near an eight-year low while the nation’s emergency reserve is at a level not seen since 1983.
Written by Lucia Kassai, Christopher Charleston and Yongchang Chin
