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Oil Giants Play It Cool As World’s Largest Crude Market Recovers


The Asian market has moved into a state of cautious expectation. Although October is still only halfway through, one can state with a great degree of certainty that this month’s aggregate crude imports are going to be some 5-6 million tons lower than September 2020 (when the entire continent imported 98 million tons). The tapering of demand is not restricted to specific regions, every single major crude importer - be it China, Japan or India - seems to be opting for lower refinery rates and less purchases. Although it might sound frightening, less crude imports might not necessarily be a negative trend, for instance China might finally digest the incredible amount of crude it stockpiled around its refiners, in fact October might resolve its fabled port congestion issues. All this, however, puts the Middle Eastern crude producers in a difficult position of trying to bridge increasing production with lower demand. There are several positive stories developing, too – gasoline margins are the highest in almost 9-months and have been growing for 3 consecutive months already as the COVID-related travel restrictions are starting to ease. This is all the more interesting as China (now that the Golden Week holiday is over), Taiwan and Japan are all expected to ramp up gasoline production in the upcoming months. Gasoil cracks were also improving in the past two weeks, primarily due to East Asian refineries decreasing output. Generally speaking, the Asian crude market seems to be currently putting the premium on lighter grades which is also noticeable from the Middle Eastern NOCs’ OSP announcements – Saudi Extra Light was hiked 25 cents per barrel month-on-month whilst the heavier grades were simply rolled over.

At the same time, purchasing activity has weakened during the past week and traditional suppliers to the Chinese market from Africa and Latin America definitely felt the pinch. On the other hand, their Middle Eastern competitors were buoyed by the lack of arbitrage into Asia, managing to escape the travails of needing to get their crudes off their hands as soon as possible. Saudi and UAE fields also experienced no production disruptions, as opposed to the US Gulf of Mexico (Hurricane Delta) and Norway (a general oil workers’ strike). Due to subdued demand when refiners have cooled their purchasing appetites ahead of the still uncertain year-end, Chinese ports were able to clear the months-long congestion that aggravated their operations this summer.  Related: The Secret Behind America’s Most Valuable Energy Play

Saudi Arabia. Playing it cool. Saudi Arabia traditionally sets the tone for the upcoming month’s OSP pricing and it has struck a rather realistic tone with its November 2020 differentials. Rolling over the heavier grades and hiking the lighter ones only marginally seemed the right thing to do, even if Arab Heavy and perhaps even Arab Medium would most probably trade below the OSP. Yet tactical nuances notwithstanding, the larger question looms on the Saudi horizon – as the OPEC+ production curtailments have dropped from 9.7mbpd in May-June to 7.7mbpd now, only to drop further to 5.8mbpd from January 2021 onwards, Saudi Aramco will be producing more and more crude. The last thing it needs is a 2nd COVID wave depressing crude prices below the $40 per barrel threshold again. According to recent media reports, Saudi Aramco has been fulfilling Asian crude allocations to the maximum for the 3rd consecutive month already. 

Graph 1. Saudi Aramco Official Selling Prices for Asia (Oman/Dubai average).

Source: Saudi Aramco. 


As opposed to Saudi Aramco, the Iraqi SOMO might be welcoming of the current weakening of demand considering Iraq’s perpetual balancing act. A chronic non-compliance with the concerted production quotas has led Iraq to take on additional supply cuts that would compensate for its massive overproduction in May-July (some 850kbpd). Hence, now Iraq’s production is capped at 3.635 mbpd instead of the initial OPEC+ quota of 3.8mbpd, which means that at least Iraq will not be overheating the market at a time of sporadic interest. The Iraqi state oil marketer has rolled over Basrah Light OSPs for Asia month-on-month and has committed to a $0.05 per barrel decrease for Basrah Heavy (unlike Saudi Aramco), all the while taking the liberty of introducing an across-the-board 0.1 per barrel hike for its evaporating exports towards the United States.  

Graph 2. Basrah Light vs Arab Medium Spread in 2018-2020 (USD per barrel).

Source: SOMO/Saudi Aramco. 

Iraqi top decision-makers seem unwilling to return to the pre-depression market practice of keeping Basrah Light prices to Asian customers roughly on par with Aramco’s Arab Medium. Although the BASL-AXM differential declined from its summer all-time highs, it has consolidated itself at +$0.60 per barrel. Somewhat mitigating the impact of this new norm, Saudi Aramco is pricing its cargoes against ICE Brent whilst SOMO (just as Kuwait’s KPC) is using the Brent Dated – their margin has widened to $1.7 per barrel in the first decade of October although less than two months ago the ICE-Dated differential stood around $0.3 per barrel. Europe-bound November OSPs were decreased, however with a logic completely reverse to that of Saudi Aramco’s moves – the lighter Basrah Light and Kirkuk were dropped $25 cents per barrel, whilst the heavier Basrah Heavy subsided $15 cents per barrel m-o-m.

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Iran. Keeping up Appearances

In two weeks, Iran will close the second year of living under stringent US sanctions that have crippled the country’s oil exports. Oddly enough, throughout the entire period Teheran has continued its peculiar tradition of following suit to Saudi Aramco’s month-ahead OSP issuances whilst remaining at odds with one of its fiercest foes. Moreover, since May 2020 NIOC has switched back to slapping a premium on Arab Light against its flagship Iranian Light grade – even for the November 2020 OSPs, Iranian Light is valued 5 cents per barrel higher than Arab Light. This might mask a hidden source of strength in the arsenal of the Iranian national oil company; however, reality of today is a bit direr than might be projected. 

Graph 3. Iranian Light vs Arab Light (versus the Oman/Dubai average).

Source: NIOC/ Saudi Aramco.

News reports about Iranian crude exports have become remarkably rare in the past few months yet their cargoes are still roaming Asian waters. An average of 8-10 cargoes depart from Iran every month and most of them disappear in and around Singapore, with some presumably ending up with Chinese refiners afterwards. Iran has also found another outlet in Venezuela, though that opportunity might be shut down very soon. All in all, Iran’s crude exports have plummeted from 2.5mbpd in 2017-2018 to 0.35mbpd currently. The general steep drop notwithstanding, Iran has managed to recover from the crash landing to 0.2mbpd exports it experienced earlier this year and with much of the US attention distracted with the upcoming presidential elections it maintains a relatively stable level of exports. 


Graph 4. Iranian Crude Exports in 2017-2020 (million barrels per day).

Source: Thomson Reuters.

By Viktor Katona for Oilprice.com

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