Why are US crude oil exports to Europe likely to decline in January?

US crude oil shipments to northwest Europe are expected to fall early next year from record highs in November as arbitrage for transatlantic shipments has been shut and freight rates have risen, according to a Reuters report. 

The spread between the US West Texas Intermediate crude oil and Brent futures has narrowed significantly in the last few trading sessions. 

At the time of writing, the spread between the two benchmarks was hovering around $3.48 per barrel.

This is the smallest closing spread since October 2023. 

A narrower spread makes it less economical to ship oil barrels from the US across the Atlantic. 

Bob Yawger, director of energy futures at Mizuho told Reuters:

US crude oil exports: rising rates and falling storage

According to the report, the spread between the two oil benchmarks has narrowed due to rising freight rates and falling inventories in the US. 

In the key storage hub of Cushing, Oklahoma, the delivery point for WTI crude, stockpiles have dropped to 23 million barrels. 

This is the lowest mid-December level in 17 years. 

Reuters said that declining storage in Cushing meant that the US barrels were being priced to stay in the country. 

US exports of crude oil had been higher last month as the spread between WTI/Brent widened to $4.50 per barrel at the end of November. 

This had encouraged more crude flows across the Atlantic Ocean to higher priced markets, thereby lifting US exports. 

Higher freight rates

The rise in exports from the US across the Atlantic may be short-lived. 

Freight rates for moving shipments from the US Gulf Coast to northwest Europe have risen roughly $1 from November to around $3.80 per barrel in December, Reuters quoted data from commodity pricing firm Argus. 

The narrowing WTI/Brent spread contributed to the higher freight rates.

This is also being used to price shipments for late January arrivals, according to the report. 

"We would expect more limited U.S. to Amsterdam-Rotterdam-Antwerp flows in the short-term to emerge," Neil Crosby, analyst at Sparta Commodities told Reuters.

The inclusion of WTI Midland crude in the dated Brent index has meant that the spread between the two is increasingly correlated to freight rates, as the price of Dated Brent is set by WTI Midland on many trading days.

U.S. exports bound for Amsterdam-Rotterdam-Antwerp hit a record high of 771,000 barrels per day in November, according to data from ship tracker Kpler.

WTI was priced at a steeper discount than $4 per barrel against Brent through most of October, when those cargoes would have been booked, making those flows more profitable.