* Asia's U.S. crude imports hit all-time high in May
* WTI discount to Brent falls to widest in three years
* U.S. crude WTI Midland, Mars, SGC head for Asia
* Replace demand for Mideast crude and cap prices (Adds total U.S. crude exports, comments, milestones)
By Florence Tan
SINGAPORE, May 16 (Reuters) - The volume of U.S. crude oil arriving in Asia is expected to hit a new high in July as Asian refiners sought arbitrage supplies to replace Middle Eastern crude after prices for Gulf grades rose, traders said on Wednesday.
U.S. crude arriving in Asia hit an all-time high of close to 25 million barrels in May with cargoes discharging in China, South Korea, Singapore, India and Malaysia, according to trade flows data on Eikon.
The volume dips to about 19 million barrels in June, but is set to rebound again in July after U.S. crude futures slipped to the widest discount in three years against Brent at $8.06 a barrel this week, according to traders and Eikon data. (CL-LCO1=R)
"The only thing that narrows the spread will be exports, which I think will really pick up throughout summer," said Michael Tran, energy strategist at RBC Capital Markets.
Weekly U.S. crude exports jumped to a record 2.6 million barrels per day (bpd) last week, according to the U.S. Energy Information Administration.
"Everyone is fixing vessels for export," one U.S. crude trader at a refinery said.
U.S. crude shipments to Europe hit a record 14.7 million barrels in April, and about 13.9 million barrels are scheduled to arrive in May, Eikon data showed.
The drop in U.S. crude prices also coincides with rising values for Middle East oil in Asia and has opened the arbitrage window, traders said.
Close to 10 supertankers, each carrying 2 million barrels of crude, have been lined up to load oil in the U.S. Gulf Coast for Asia, two of the traders said. These are expected to arrive in July, they said.
"WTI Midland is coming across," a third trader said, adding that refiners such as JXTG Nippon, SK Energy and Cosmo Oil have bought U.S. crude.
Last week, Indian state-refiner Indian Oil Corp (IOC) bought 3 million barrels of Louisiana Light Sweet and WTI Midland crude for loading in June.
South Korea's second-largest refiner GS Caltex has bought 5 million barrels of U.S. crude, mainly Eagle Ford and WTI Midland, for June to August delivery, up from 4.75 million barrels in the first five months this year, a company spokesman said.
Some of the popular U.S. grades in Asia such as WTI Midland, Mars and Southern Green Canyon can now compete with Middle East grades such as Murban and Oman in Asia, traders said.
WTI Midland crude delivered to North Asia is priced at a premium of close to $5 a barrel to Dubai quotes, comparable with Abu Dhabi's Murban, while Mars crude cargoes are being offered at $1.50 a barrel above Dubai quotes, competitive with Oman, they said.
Light sweet WTI Midland comes from the Permian basin, a region which was a key contributor to record shale oil production in June. The grade's cash discount (WTC-WTM) hit the lowest in four years earlier this month.
"The value for Midland is better than Murban for cargoes landing in China," a trader with a Chinese company said, adding that the influx of U.S. oil supplies may put some downward pressure on Middle East crude prices.
U.S. coastal crude grades such as Mars (WTC-MRS) and Louisiana Light Sweet (LLS) (WTC-LLS) have rallied to the highest premiums versus U.S. crude futures since January, helped by declining imports and an increase in exports.
The Middle East crude market has been underpinned by supply cuts by the Organization of the Petroleum Exporting Countries, peak summer demand and as fears of disruption in Iranian supplies after the United States withdrew from a global nuclear pact fueled sentiment.
(Reporting by Florence Tan; additional reporting by Devika Krishna Kumar in New York, Jane Chung in Seoul and Osamu Tsukimori in Tokyo; editing by Sherry Jacob-Phillips and Jonathan Oatis)