Recently, China made it clear that it plans to move away from its rigid string of lockdowns, arguably the main demand-curbing trend in Asia over the course of 2022. When setting their June 2022 official selling prices (OSP), most Middle Eastern oil producers did not know that the restrictions were set to be relaxed on June 01, though they could have anticipated it. At the same time, the likes of Saudi Aramco or SOMO already understood the general trend of oil markets – the European Union has been closing in on a Russian oil ban, Asia is heading into a season of strong summer demand as the physical availability of products remains below historical standards, and all this is taking place against the background of backwardation easing across all pricing benchmarks. So in a way, it was evident that they needed to cut, especially with Russian crude making such inroads into India and upending the usual flow map of the oil markets, the real question was whether NOCs could risk going against the main trends.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
Cognizant of potentially lower buying on the back of China’s lockdowns and a general easing in the futures curve, Saudi Aramco lowered its Asian prices for June-loading cargoes by $4.95 per barrel for all the key streams. Only Arab Super Light, a relatively small grade of some 100,000 b/d that mostly sails to Aramco-controlled refineries, saw a bigger decrease than that, dropping by -$5.10 per barrel, though still selling for a premium of $5.75 per barrel vs the Oman/Dubai average. This was by no means a surprise to the market at large – the backwardation in the Dubai cash-futures spread, having soared to an almost unimaginable $8.8 per barrel in March, dropped back to $3.7 per barrel in April, so the $5 per barrel month-on-month change is fairly justified when looking at the futures curve. Attesting to the overall lack of understanding as to where the markets are headed, refinery margins in Asia have been hitting all-time highs recently, meaning Aramco could have cut its Asian prices by much less if it were certain that refining strength outweighs demand concerns.
Chart 2. Saudi Aramco’s Official Selling Prices for European Cargoes (vs ICE Bwave).
Source: Saudi Aramco.
As Europe buys increasingly less Russian Urals crude, especially countries in Northwest Europe, many of which have self-sanctioned from buying any more Russian hydrocarbons, the dilemma Saudi Aramco faced with its European OSPs was that of extent, namely how low could it lower the formula prices without selling them too cheap. In the end, NW Europe OSPs for June were decreased by $2-3 per barrel, with Arab Medium witnessing the smallest month-on-month decline. Likewise in the Mediterranean, where Arab Medium (arguably the closest grade to Urals in terms of quality) also dropped $2 per barrel, to a $0.20 per barrel premium vs ICE Brent. Potentially signaling Aramco’s unwillingness to hike exports towards the United States, US-bound June OSPs were simply rolled over from May (when they reached an all-time high).
In a recent public utterance, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman stated that Riyadh would be aiming to reach an oil production capacity of 13.2 million b/d by 2027, with output additions coming from Aramco’s current portfolio of projects as well as fields in the Neutral Zone (jointly owned with Kuwait) which have been operating only at some 50% of their nameplate capacity. This might also suggest that Aramco’s immediate options to ramp up production are rather limited, and a sizable part of Saudi Arabia’s spare capacity might in fact take several years to see the light of the day.
Chart 3. ADNOC Official Selling Prices for May 2022 (set outright, here vs Oman/Dubai average).
The flagship grade of UAE national oil company ADNOC, the light sweet Murban, saw its June outright price fall to $104.48 per barrel, a decline of $8 per barrel compared to last month. Being linked to Murban, the differentials of all other Emirati grades were lowered month-on-month, with Upper Zakum once again witnessing the largest changes. Part of it might be coming from Zakum taking a much higher share in overall UAE crude exports recently as April figures have already the medium sour grade and Murban at roughly the same level of outflows, just a little below 1 million b/d. Yet with Asian refining margins as good as ever, specifically middle distillate inventories still trending at lows that were unimaginable for years, it does seem as if ADNOC is trying to incentivize global buyers to buy more of Zakum. Coming back to June OSPs, this month’s pricing decisions widened the Murban-Upper Zakum spread to $2.10 per barrel, up 30 cents per barrel from last month.
Chart 4. Iraqi Official Selling Prices for Asian cargoes (vs Oman/Dubai average).
Offsetting smaller-than-anticipated increases into May pricing, the Iraqi state oil marketer SOMO decided to take it lighter with June 2022 OSPs and dropped the Asia-Pacific prices by $3.00 and $3.20 per barrel for Basrah Medium and Basrah Heavy, respectively. This is almost $2 per barrel lower than Saudi Aramco, however in the grand balance of things, formula prices are back where they were before backwardation got really severe in March. In Europe, however, SOMO’s June prices were largely in line with Saudi Aramco, lowering the OSPs by $1.90-$2.60 per barrel. Strangely enough, it is SOMO’s European exports that might see a huge boost over the upcoming weeks, though most likely it will not come from cargoes loading at the port of Basrah – ever since the February ’22 Supreme Court ruling indicating that the Kurdish Regional Government’s oil dealings were unconstitutional, price differentials and overall buying interest for Kirkuk plummeted and the likelihood of federal Baghdad authorities picking up this stream keeps on increasing.
Chart 5. Iraqi Official Selling Prices for European cargoes (vs Brent Dated).
The Iranian national oil company NIOC toed the line of its Middle Eastern peers, lowering Asian prices by -$4.95 and -$5.00 per barrel for Iranian Light and Iranian Heavy, respectively. European pricing was kept within the boundaries of Aramco’s pricing changes, ranging from declines of -$2.1 per barrel for Iranian Heavy in both Med/NWE to a -$3.05 per barrel decrease to Iranian Light in the Mediterranean. Whilst notable as a trend, these prices still do not reflect reality as no European buyer has been seen buying Iranian crude over the past 3 years. Iranian exports have been increasing in importance over the past months, trending around 900,000 b/d according to Kpler data. Whilst China still remains the key buyer of Iranian crude, there have been some new trends developing. Now that Iran is invested in revamping Venezuela’s 140,000 b/d El Palito refinery, the flow of Iranian barrels to the Latin American country has risen to approximately 100,000 b/d – it would be more or less safe to assume that most of it would be condensate to dilute heavy domestic production.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).
Even accounting for stable deliveries to Syria, this still leaves NIOC with a huge 800,000 b/d flow to China. With protracted lockdowns eating into Chinese demand, a lot of Iranian cargoes have been anchored outside Singapore and Malaysia, waiting for restrictions to end – this might also mean that future exports might not be as strong as the current rate, after all, Chinese buyers will need to digest first the volumes they are yet to receive. Following the impasse of Vienna talks since early March, hopes for a revival of the JCPOA deal have started to fade, to the extent that Iran has ceased to be a factor in most analysts’ short-term supply/demand prospects. Whilst neither side has officially given up on the assumed goal, in fact, the European Union’s high representative traveled to Teheran as recently as mid-May, the agreed-upon nuclear framework has been dwarfed by long-ranging political dilemmas, such as the Biden Administration’s reluctance to remove the Islamic Revolutionary Guard Corps from its list of terrorist organizations.
Chart 7. Kuwaiti Official Selling Prices for Asian cargoes (vs Oman/Dubai average).
The Kuwaiti national oil company KPC mirrored the June pricing changes set by Saudi Aramco completely, lowering the Asian differential of its main KEB by $4.95 per barrel vs May OSPs and rolling over its US formula price. The only region where KPC’s pricing differed from that of its Saudi peer was Europe, however that discrepancy is largely irrelevant as the last time any European nation saw a Kuwaiti cargo arriving was back in April 2020. The mirroring of Saudi pricing is noteworthy, considering that the actual pool of available crude will be decreasing over time – Kuwait’s 615,000 b/d Al-Zour refinery is expected to be operational over the next few weeks, with the crude distillation unit set to come online next month. This means that domestic refining will eat up a sizeable chunk of crude volumes that are currently exported, in fact approximately a third of the 1.8 million b/d currently leaving Kuwait every month.
By Gerald Jansen for Oilprice.com
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Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands. More