CAN WTI COMPETE IN ASIA?
The bulk of the U.S. crude going to Asia is light and sweet, and therefore competes with grades like Nigeria’s Bonny Light BON-E and Angola’s Girassol GIR-E. While West Texas Intermediate (WTI) futures have dropped sharply since their peak in early October, the price of physical WTI delivered in Houston, as assessed by Argus Media, hasn’t fallen by as much. WTI Houston was at $53.88 a barrel on Jan. 4, while WTI futures were at $47.96, a discount of $5.92 a barrel. Six months ago, WTI Houston was at $75.79 a barrel and the futures were $74.13, showing that since then the investor market has become more bearish on U.S. crude prices than the physical market. Comparing WTI Houston to Girassol shows that the Angolan grade traded at a small premium on Jan. 4, closing at $56.24 a barrel to WTI Houston’s $53.38. The small price advantage for the physical WTI is not enough to overcome the higher cost of a longer voyage to Asia, meaning that U.S. crude is currently uncompetitive. This suggests that U.S. exporters will have to be prepared to offer deeper discounts if they wish to displace West African barrels from the Asian markets. A further complicating factor is the new output cuts announced by OPEC and its allies, chiefly Russia. It’s likely that much of the oil affected by the production restrictions will be medium to heavy grades, given that the bulk of the cutting will be done by Saudi Arabia and Russia. This is likely to tighten the market for heavier grades, which are not readily replaced by light crudes, such as WTI, even if there are plentiful supplies of the light crudes. This means that even if the United States is increasing its output, there may not be enough demand for light crudes to soak up the extra supply.