February 6, 2020 / 6:31 AM / 12 days ago

U.S. crude flows to Europe set to rise as coronavirus hits Asia demand

NEW YORK/MOSCOW (Reuters) - U.S. crude flows to Europe are set to increase over the coming month as demand from Asia has plummeted due to the coronavirus outbreak, traders and shipbrokers said.

FILE PHOTO: A pump jack operates at sunset in Midland, Texas U.S. February 11, 2019. REUTERS/Nick Oxford/File Photo

Activity to charter Aframax vessels, which can carry about 600,000 barrels of crude, are busy for the trans-Atlantic route, two shipbrokers familiar with the matter said.

Petrochina, Trafigura, Vitol, Lukoil and Exxon Mobil Corp are among those looking to ship cargoes from the U.S. Gulf Coast to Europe, one source said.

The rapidly spreading coronavirus has killed hundreds and sapped fuel demand in China, where thousands of flights have been canceled and the city of Wuhan, the epicenter of the epidemic, remains under quarantine.

China is the world’s biggest importer of oil, taking in more than 10 million barrels per day (bpd) in 2019, according to government statistics, and the reduced demand has threatened to cause a glut of supply around the world. Oil prices have fallen sharply in the wake of the outbreak, even as major oil producers consider additional supply cuts.

Asia’s largest refiner, China’s Sinopec Corp , is cutting throughput this month by around 600,000 bpd, sources told Reuters.

Those cuts are the steepest in over a decade and come as independent refiners also reduce runs by 30% to 50%.

“The U.S. has to divert barrels away from China and are now dumping everything to Europe,” one trader said.

Consultancy Wood Mackenzie cut its global oil demand forecast for the first quarter by nearly 900,000 bpd to 98.8 million bpd, noting that the effect on demand remains uncertain. Overnight, China cut tariffs on numerous U.S. goods in half, including crude oil, dropping that import levy to 2.5%.

Flows are headed toward Europe even though the spread between U.S. crude futures and international benchmark Brent has narrowed, which typically makes U.S. crude less attractive to foreign buyers.

The narrowed spread has been offset by tumbling freight rates for tankers. Rates for VLCC vessels traveling eastward plunged to near their lowest levels since September.

Supplies in the Atlantic Basin are rising due to reduced buying from Asia. That may hurt European and Mediterranean oil grades due to heightened competition, one trader in the European market said.

Sellers of Latin American crude grades have also been affected, two traders with European majors said. “There are big discounts for selling Latin American heavy grades to Chinese refiners right now,” one trader said. “Countries with exports that are not so diversified are feeling the pain.”

Chartering activity for VLCCs, which can transport about 2 million barrels of crude, to ship U.S. crude to Asia several weeks from now are currently steady, the sources said. That’s an indication that shippers believe the hit to demand for the broader region may not be prolonged.

Occidental Petroleum Corp, Mercuria, Vitol and Trafigura are among the companies looking to charter vessels for the U.S.-to-Asia route, one source said.

Chevron Corp and Trafigura were seeking to charter vessels to load U.S. crude to Asia in early March, the source said.

Shipments to South Korea, Taiwan and Japan, among the top destinations for U.S. crude exports to Asia, should continue, said Andy Lipow, president of Lipow Oil Associates in Houston.

Reporting by Devika Krishna Kumar in New York and Olga Yagova in Moscow; Additional reporting by Laila Kearney in New York, Marianna Parraga in Mexico City and Dmitry Zhdannikov and Julia Payne in London; Editing by Lisa Shumaker and Jonathan Oatis

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