West Texas Intermediate (WTI) crude oil prices have jumped to record highs as competition intensifies between Asian and European refineries for U.S. crude to compensate for disrupted oil flows from the Middle East due to the Iran conflict.
Typically, Europe is the largest importer of U.S. crude oil, but competition has escalated as Asian buyers seek supplies from America to replace Middle Eastern oil that cannot be transported through the Strait of Hormuz.
Details of the Event
The sudden rise in oil prices has led to increased costs and exacerbated losses for refineries in Europe and Asia, according to Reuters, citing sources and analysts. This situation places significant pressure on companies, including state-owned enterprises that governments require to continue fuel production for national security purposes.
Paola Rodriguez Masiu, a senior oil analyst at Rystad Energy, noted in a memo dated April 3: "Asian refineries, deprived of Middle Eastern supplies, are fiercely competing for every available barrel of Atlantic Basin crude."
Background & Context
Traders reported that offers for Midland WTI crude delivered to North Asia in July on board very large crude carriers included premiums ranging from $30 to $40 per barrel, depending on the reference price used.
One trader estimated the premium at $34 per barrel compared to Dubai prices, while another pegged it at $30 per barrel above Brent crude prices, according to Reuters.
Impact & Consequences
Two other traders indicated that offers had risen to nearly $40 per barrel above Brent crude prices on the Intercontinental Exchange for August. One trader explained: "A new price appears every day," adding that Asian refineries are incurring heavy losses due to these premiums.
Another trader mentioned that it would be better for refineries to reduce stored crude oil quantities and opt for spot purchases if offers are available.
Regional Significance
Spot price premiums surged after the monthly spot differential for WTI futures reached its widest range on Thursday. The term "backwardation" refers to spot prices being higher than prices for later months.
Larger discounts on U.S. crude compared to Brent have also spurred demand for oil tankers along the U.S. Gulf Coast, reducing vessel availability in the region and increasing shipping costs.
In Europe, offers for WTI crude from the Midland region delivered to European countries reached a record level of nearly $15 per barrel above Brent on Thursday.
Rodriguez Masiu stated: "Given the current price differentials and shipping costs, European refineries purchasing spot crude oil cannot achieve profits by processing these barrels in their systems."