U.S.-Asia Oil Arbitrage Narrows Amid Freight Rate Surge

US crude oil arbitrage to Asia is narrowing due to higher tanker rates and a rising WTI price. The arbitrage window is expected to close as the additional cost for carrying crude from the US Gulf Coast to Asian importers reaches $1.75 per barrel. US oil exports to Asia are set to increase in September, but some expect prices to ease, reopening the arbitrage window.

The arbitrage window for shipping U.S. West Texas Intermediate (WTI) crude oil to Asia is narrowing rapidly, according to recent trade sources. This narrowing is primarily attributed to surging tanker freight rates and escalating WTI premiums, which are threatening to shut down the U.S.-Asia oil arbitrage.

The U.S.-Asia arbitrage, which opened in late July, has seen a surge in demand for Very Large Crude Carriers (VLCCs) to transport oil over the two-month journey from the U.S. Gulf Coast to Asia. This increased demand has tightened vessel supply, driving up chartering costs. Last week, the cost to charter a VLCC for this route surged to $12.5 million, the highest since March 2023, before easing to $12 million this week Surge in shipping costs, WTI premiums threaten to shut US-Asia oil arbitrage^[1].

Strong export demand from Asia, particularly from South Korea and India, is also pushing up premiums for WTI. According to Kpler's provisional data, U.S. exports to Asia are expected to jump in September, with additional purchases from Pakistan's largest refiner Cnergyico and Vietnam's first import for the year Surge in shipping costs, WTI premiums threaten to shut US-Asia oil arbitrage^[1].

The cost to ship WTI from the U.S. Gulf Coast to China has added approximately $1.75 per barrel to the shipping costs, making the arbitrage less profitable. "That alone would close the arb," said a U.S.-based trader. Offers for 2 million barrels of WTI for delivery to Asia in December were at about $4.50 to $5 a barrel above dated Brent, while Murban crude could land in Asia at about $5 a barrel above Dubai quotes Surge in shipping costs, WTI premiums threaten to shut US-Asia oil arbitrage^[1].

While some traders believe the arbitrage window is closed for now, others are watching for offers of November-loading WTI cargoes. Sparta Commodities analyst June Goh expects freight rates to ease, which could improve the arbitrage economics for WTI Surge in shipping costs, WTI premiums threaten to shut US-Asia oil arbitrage^[1].