When OPEC+ agreed on its 400,000 b/d monthly increases back in August 2021, the overwhelming expectation for the first months of 2022 was a gradual return to normality, with key Middle Eastern crude producers ramping up production to almost pre-pandemic levels. Fast-forward to today and the world is facing a completely different picture – inventories are the tightest in almost a decade, with the pace of stock depletion unparalleled in recent decades. The same key Middle Eastern powerhouses have played a part in this, underperforming their production quotas – in fact, the divergence between self-reported figures and third-party assessments keeps on increasing, potentially insinuating that the likes of Saudi Arabia stalled the monthly additions knowingly. Against the background of tight inventories and invariably robust demand across markets, Saudi Aramco hiked all its March-loading formula prices.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
The Dubai cash/futures spread, i.e. the difference between M1 and M3 futures, moved up some 65 cents per barrel last month so the fundamentals suggested that the increase be somewhere within the $0.5-$0.7 per barrel interval. And after several months when Aramco’s reaction to market developments provided for some unwelcome surprises, the Saudi NOC set its March OSPs fully in line with what the futures curve suggested. Its lightest grades saw the smallest month-on-month increase, with Arab Super Light and Extra Light ramped up by 30 and 40 cents per barrel, respectively. On the other hand, Arab Heavy and Arab Medium – both grades being long-time favorites with Chinese refiners – were hiked by 70 cents per barrel. Considering that flows of Arab Heavy have dropped significantly starting from January, down some 300,000 b/d from average levels in Q4 to just a little above 900,000 b/d, as well as Dubai backwardation steepening again, the OSP for April 2022 might bring another all-time high differential for the heaviest of Saudi grades.
Chart 2. Saudi Aramco’s Official Selling Prices for US Cargoes (vs ASCI).
Source: Saudi Aramco.
Despite seeing four separate missile attacks over January, presumably coming from Yemen’s Houthi militias, the Emirati national oil company ADNOC managed to maintain production and exports. In contrast to Saudi Arabia and Iraq, oil exports from the UAE went up in January in line with the country’s OPEC+ addition rate, up by some 60,000 b/d to a total of 2.68 million b/d. As usual, ADNOC’s pricing was the first to surface on the basis of IFAD Murban trades over the preceding month. Attesting to Murban’s increased appeal, the Emirati flagship grade saw its premium over front-month Dubai cash prices reach almost $1.80 per barrel, just a tad below the all-time high seen in January this year. The light sour Umm Lulu and heavy sour Upper Zakum saw their differentials to Murban rolled over from February 2021 (at +$0.05 per barrel and -$1.55 per barrel, respectively), whilst Das was marginally decreased to a -$0.40 per barrel discount to Murban.
Chart 3. ADNOC Official Selling Prices for March 2022 (set outright, here vs Oman/Dubai average).
Comparing current export levels to pre-pandemic levels is a tricky endeavor as many Middle Eastern producers have brought new downstream capacities onstream – to name just one example, Saudi Arabia is still lacking some 400,000 b/d in terms of its crude exports vs March 2020 (comparing it to April 2020 would have been pointless as then all inventories were splashed out), yet that is exactly the capacity of the recently launched Jizan Refinery. In this sense, ADNOC might provide a little sneak peek into the workings of OPEC+ as the Emirati NOC forecasts its own production per grade. According to its own assessments issued late last year, the January 2022 export volume of Murban was assumed to reached 1.22 million b/d (fairly in line with export allocations in the pre-pandemic period) yet, in the end, it was more than 150,000 b/d lower, potentially (once again) hinting at a self-imposed OPEC+ production slowdown.
Chart 4. Iraqi Official Selling Prices for Asian cargoes (vs Oman/Dubai average).
Iraqi exports last month remained flat month-on-month, averaging some 3.2 million b/d – essentially the entirety of Basrah Light was blended into the Basrah Medium stream. At the same time, Iraq produced only 4.16 million b/d in January, 120,000 b/d below its production target, implying that Baghdad might have even more serious problems in ramping up output further down the road. In addition, Iraq’s federal Supreme Court might have revived a long-term spat with the Kurdish Regional Government by ruling that Erbil should not produce and market oil independently of the central government in Baghdad, keeping Iraqi oil authorities busy with internal issues. With this, Iraq’s state oil marketer SOMO increased Asia-bound OSPs for March 2021 by 80-95 cents per barrel, with the heavy sour Basrah Heavy seeing the largest m-o-m hike.
Chart 5. Iraqi Official Selling Prices for European cargoes (vs Brent Dated).
European pricing might become quite the headache for SOMO. At first glance, it seems normal enough – SOMO followed Saudi Aramco in hiking Europe-bound prices by 25-50 cents per barrel, with Basrah Medium, by far the largest crude stream after the discontinuation of Basrah Light, seeing the highest month-on-month increase at a relatively palatable -$4.65 per barrel discount to Dated Brent. Yet this is where the trouble kicks in – Saudi Aramco prices its European cargoes off ICE Brent, whilst both Iraq and Kuwait rely on spot assessments. In contango markets, having a cargo that prices in sooner would be a boon for the buyer, however, we have been seeing the steepest backwardation in the markets since at least 1993. The real-time difference between spot Dated prices and front-month ICE Brent quotes stands at a whopping $5 per barrel and with the nomination period for April coming up in a couple of weeks, demand for Iraqi barrels might suffer the inevitable setback.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs ICE Bwave).
The return of Iran to oil markets remains one of the key known unknowns of 2022, with the Vienna talks reportedly making tangible headway and being only a couple of steps away from being finalized by all participating parties. Iran’s national oil company NIOC is cognizant of the widening window of opportunity, having already ramped up exports to some 800,000 b/d in December-January. NIOC took almost two weeks to issue its March 2021 pricing after Saudi Aramco started the Middle Eastern round of pricing strategy announcement – either it is too busy with ensuring that the Vienna talks go according to plan, or it was having qualms about the upcoming months’ required change. In the end, Asian prices were hiked by 65-70 cents per barrel, i.e. marginally more than the Saudi ones, narrowing the Iranian Light-Arab Light to -0.15 per barrel, the strongest in 11 months.
Chart 7. Kuwaiti Official Selling Prices for Asian cargoes (vs Oman/Dubai average).
Kuwait has increased the March OSP of its flagship Kuwait Export Blend by $0.75 per barrel, 5 cents per barrel higher than the Saudi equivalent of Arab Medium (they both share an API density of 31 and a sulfur content of 2.5%). Interestingly, Kuwait has not had a cargo to Europe in many months, yet it committed to a much more buyer-friendly pricing routine with European prices, hiking them by 20-40 cents per barrel, a fraction of the changes stipulated by Saudi Aramco. Meanwhile, Kuwait Super Light, the most recent addition to the country’s crude slate, has seen its Asian differentials move up by 30 cents per barrel to a total premium of $3.35 per barrel against the Oman/Dubai average. This has brought the KSLC-AXL spread to its widest since July 2021, at -$0.25 per barrel, most probably stemming from weaker Northeast Asian demand overall as Japan emerged as the main buyer of the light sour grade.
By Gerald Jansen for Oilprice.com
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