Panic-driven market narratives can play a huge role in aggravating seemingly usual situations. Take, for instance, arguably the biggest story of the past weeks. Namely, that the US and other major importers are asking OPEC+ to bring more crude into the market, even though the oil group has so far been quite meticulous in its compliance (Saudi Arabia alone exported in October almost 500,000 b/d more than before). Whilst one might surely understand the drive to decrease fuel prices or to curb runaway inflation, the subsequent utterances seemed to have fortified the feeling of an impending tightness in the markets. This feeling was also corroborated by extremely weak Dubai differentials. The usual marker of East-to-West arbitrage possibilities, the Brent-Dubai EFS, surged to multi-year highs and has trended above 5 per barrel this month, making imports of barrels from Atlantic Basin almost impossible for Asian refiners.
Chart 1. Saudi Aramco Official Selling Prices for Asia vs Oman/Dubai Average (USD per barrel).
Source: Saudi Aramco. Against all the above-mentioned circumstances, Saudi Aramco issued its December 2021 OSPs. To say that they came as a bit of a surprise would be an understatement, by hiking all its formula prices (Asian ones by $1.10-2.80 per barrel m-o-m) more than double of what analysts’ estimates indicated Saudi Aramco carried out the most drastic monthly change since the summer of 2020 when the renewed OPEC+ deal was still in its infancy. Weak fuel oil cracks notwithstanding, even Arab Heavy saw a rise bigger (+1.10 per barrel compared to November prices, at a $0.60 per barrel premium to Oman/Dubai) than that of the Dubai futures, the usual basis of Aramco price changes. Yet with ever-weakening arbitrage and really good refining margins – primarily caused by the refining weakness in China that was triggered by the still-ongoing electricity use mandates – it was perhaps expectable of the Saudis to avail themselves of such an opportunity. Yet in a tour de force, Saudi Aramco pulled off a similar trick with European and American prices, too.
Chart 2. Saudi Aramco Official Selling Prices for Northwest Europe vs ICE Bwave (USD per barrel).
Source: Saudi Aramco.
Iraq has embarked upon a thorough revamping of its crude flows – whilst SOMO is still yet to confirm it officially, the market has it that Basrah Light quotes would be fully discontinued from January 2022 onwards. Lighter Iraqi barrels would be refined domestically; however, we expect that most of what constitutes Basrah Light now would end up in the largest export flow, Basrah Medium. In another sign of Iraq trying to adapt to changing circumstances, SOMO has significantly squeezed the volume of crude it allots to Western majors as compensation for their investment into Iraqi upstream, most probably in a bid to extend the pool of term flows going to Asian buyers. With this, Chinese and Indian refiners are expected to receive a higher-than-usual term allocation in December, just when SOMO hiked the overall formula prices and shied away from further pricing strategy jousting with Saudi Aramco.
Chart 3. Iraqi Official Selling Prices for Asia (USD per barrel).
With Iraq trying to undercut Saudi Aramco in the past months with its pricing into Asia and Europe, there was some expectation of SOMO trying to buck the Saudi-indicated December trend and hike prices less markedly. That, however, did not happen and SOMO replicated the Saudi price hikes across its pricing – in Basrah Light’s last presumed month of pricing it increased its Asia-bound December OSP by $1.50 per barrel, to a premium of $1.95 per barrel. Probably the only main difference between Saudi and Iraqi pricing is that Basrah Heavy only saw a $0.40 per barrel month-on-month increase, primarily because Saudi Arabia does not have a grade as bad in overall quality terms as the Iraqi heavy stream. At the same time, Iraq has given some nuance to its US prices – where Saudi Aramco hiked everything by 50 cents per barrel despite them being assessed against the same benchmark, ASCI – and only increased Basrah Light prices, whilst committing to marginal price cuts on Basrah Medium and Heavy.
Chart 4. Flagship Middle Eastern Medium Sours in 2018-2021 (USD per barrel).
Source: Saudi Aramco, NIOC, SOMO.
Overall Middle Eastern export flows to the United States were in structural decline over 2017-2020, bottoming out in October 2020 when a mere 160,000 b/d of crude was shipped (as per Kpler data), one tenth of what it was in late 2016. Yet US refiners did not stop buying Middle Eastern barrels altogether, throughout this year (and especially in the last three months) the average volume of departures towards the US hovered around 600,000 b/d. With most of it being Saudi, the Iraqi decision to be more competitive on the US pricing makes perfect commercial sense. On the other hand, Iraq has had a really strong October when it comes to European exports – be it Basrah Medium or Heavy, term buyers were maxing out their purchases, especially Turkish refiners. With Saudi export to Europe being essentially flat over the past months and Iraqi exports being priced against Dated Brent (and not ICE Brent as is the case with Saudi Aramco), SOMO could have opted for a softer approach with its pricing.
Chart 5. Iranian Official Selling Prices for Asia (basis FOB Kharg Island vs Oman/Dubai average, USD per barrel).
In line with Iraq and Saudi Arabia, Iran increased its December 2021 OSPs by $1-1.40 per barrel for Asian buyers, hiking Iran Light the most, to a $2.50 per barrel premium against Oman/Dubai. European prices witnessed an even more drastic month-on-month increase, with changes ranging from $1.20 per barrel for niche grades to the Mediterranean to +2.10 per barrel for Iran Light in NW Europe. In real terms, these price formulas remain a somewhat irrelevant exercise in pricing as the last Iranian cargo to presumably sail towards Europe dates back to January 2020 (to Turkey which kept on buying some Iranian barrels even after the official US sanctions were levied). Iranian exports continue to be focused primarily on China, the main buyer of NIOC barrels and arguably the only country that could not get into trouble for doing that.
Chart 6. ADNOC Official Selling Prices in 2017-2021 (USD per barrel).
This being said, it would be erroneous to search for direct Iran-to-China crude flows, most of the barrels get moved into the Malacca Strait where it gets to be transferred via an STS, only to be further moved to China. That is indeed why most vessel-tracking software would indicate Malaysia as the main recipient of Iranian crude, to the order of some 400,000 b/d last month. Counting direct supplies and the sporadic subsidized cargo to Syria/Lebanon, Iranian exports have kept relatively stable around the 600,000 b/d mark.
Chart 7. Kuwait Superlight Crude Premium vs Oman/Dubai Average and vs Arab Extra Light (USD per barrel).
Source: KPC, Saudi Aramco.
Kuwait’s crude pricing for December was also rangebound, increasing its flagship KEB export blend by $1.25 per barrel for Asia Pacific and $1.45-1.55 per barrel for European customers. Interestingly, Kuwait was one of the most noticeable Middle Eastern nations that did not ramp up crude exports over the past weeks despite stipulated 30,000 b/d monthly increments under the OPEC+ deal. At the same time, Kuwait has only recently presented its 2025 vision, aiming for a 3.5 million b/d production target, i.e. half a million barrels per day higher than now. In many ways, this will depend on output coming from the Neutral Zone – a strip of land shared with Saudi Arabia – that is still underproducing given technical difficulties in bringing back production that was idled for several years. Moreover, if Kuwait is to become bigger and better, it would need Saudi Arabia’s consent to such a stance, a feat that has become somewhat difficult to land in the past years.
By Gerald Jansen for Oilprice.com
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