India’s Faltering Oil Demand Sets The Tone For Middle East Producers

India's COVID travails have become the main talking point when it comes to Asian crude demand, once again pushing out the timeline of things finally settling down. China is gradually coming out of its planned maintenance, OPEC+ have already started to bring back part of the 2.1mbpd halted output that they committed to, in addition the United States and Europe are making strides in their vaccination roll-outs, however against all of the above developments it was the debilitation of India that has resonated the most with Middle Eastern oil producers. It need not be always reflected in their OSPs (official selling prices) for June 2021, however the Indian case will further hinder Asia's demand. For instance, Saudi Aramco's aggressive pricing policy meant less term nominations which in turn freed up those barrels for spot purchases - if India issues no purchase tenders, who will buy all those cargoes? The question might seem to be too banal to respond yet recent months' aggressive pricing policy of the Middle East's main trendsetter, Saudi Aramco, has compelled some buyers (even those operating in relatively low-impact countries such as South Korea) to nominate less than the total monthly quantity for May 2021. Saudi Aramco dropped the differentials of all its Asia-bound grades yet chose to do it sparingly, by 10-30 cents per barrel from May 2021 OSPs. On paper Aramco had every reason to do so, considering that the cash/futures spread for benchmark Dubai narrowed 15 cents per barrel from March, to 1.04 USD per barrel. At the same time, Aramco issued the June OSPs already knowing that demand was faltering, especially so for medium-to-heavy grades, and India's descent into full-blown mayhem. Decrying the still-too-high differentials, many Asian analysts to predict another month of Saudi spot deliveries changing hands below the officially stipulated OSP. 

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Source: Saudi Aramco.

Aramco has been much more adventurous in its Europe-bound OSPs, cutting all grades by 50-80 cents per barrel. Although regional competitor Urals has been weak throughout April, the Saudi OSPs coincided with Urals differentials firming up - thus, June might see an increased intake of Saudi cargoes amidst improving economics. Just as much as Saudi Aramco will be relishing the opportunity to ramp up oil production - by the end of June it would have brought back 0.6mbpd out of its voluntary 1mbpd OPEC+ commitment - yet it should remain cognizant of the challenges laying ahead. Most notably among them, Saudi Arabia's GDP contracted 3.3% in Q1 2021, continuing last year's decline when it declined 4.1% year-on-year on annualized basis. This means that despite the already hefty dividends that Aramco pays to Riyadh, this year will trigger even interdependence between Saudi Arabia's budget controls and oil revenues. 

Source: ADNOC.

The forthcoming month will see the first-ever OSP set for Emirati grades that was automatically set by the ICE Futures Abu Dhabi (IFAD). Trading activity was reasonably robust on the IFAD with more than 160 000 contracts trading last month alone - one lot representing 1000 barrels there were 5 110 contracts going into expiry on the last day of April, meaning that a total of 5.11 MMbbls of Murban will see a physical delivery in June. The only lowlight of IFAD's first pricing month was that despite the solid monthly average (6 625 lots), trading has all but ran out of steam by the end of April. On April 30 IFAD reported only 71 lots traded, which resulted in a whopping 1 USD per barrel plummeting of the new benchmark, within just one day - IFAD dropped to a 0.08 USD per barrel premium to front-month Dubai. Exactly two weeks before that its premium reached its apex of 1.86 USD per barrel against Dubai, raising fears that intra-month oscillations might be a recurring phenomenon.  

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The June 2021 Murban OSP was set on the basis of the April average at 63.35 USD per barrel, equivalent to a $0.46 per barrel premium to the Platts-assessed cash Dubai. This marks an almost 1 USD per barrel drop month-on-month, though it also reflects Asian trading more accurately than the Saudi OSPs. ADNOC being the first Middle Eastern NOC to issue its selling prices within the month (i.e. as soon as May halts trading, one can gauge the July 2021 OSP) creates a bit of breathing space for Saudi Aramco, too, having been the harbinger of Middle Eastern things to come in the past decades. The Murban futures will also provide greater transparency as opposed to the other physically delivered Middle Eastern benchmark, Oman, the majority of which is scooped up by Chinese buyers and is thus susceptible to price manipulation in one way or another, considering that on a daily basis there is roughly 1mbpd of Murban sailing the seas (1.04mbpd in June as ADNOC seeks to gradually ramp up output). 

Source: KPC.

Kuwait has had a difficult April as it had to cope with a fire breaking out at its largest oil field (and the second largest globally), the Great Burgan field. Luckily for the Kuwaiti national oil company KPC the blaze did not impact production (monthly export loadings were 54 MMbbls against 53 MMbbls in March 2021). The June OSP of Kuwait's flagship grade, KEB, quality-wise the twin brother of Arab Medium, was cut 20 cents per barrel from May 2021 to a 1.15 premium against Oman/Dubai; implying that KPC has concurred with Aramco's view on medium sour differentials in Asia. On the other hand, June 2021 will be the third consecutive month when KPC lowers the differential of Kuwaiti Super Light Crude (KSLC) vis-à-vis Arab Extra Light, in a rather evident move to incentivize buyers. KSLC is lighter than most Middle Eastern peers (47° API; 1.6% Sulphur) and has so far never made a voyage West of Suez; its most frequent buyers are Pakistan, India, New Zealand and occasionally China, too. 

Source: SOMO.

The Iraqi state oil marketer SOMO has once again introduced a slight hint of nuance into its June 2021 official selling prices, cutting its Basrah Light price by 15 cents per barrel to a 1.25 USD per barrel premium against the Oman/Dubai average, i.e. 5 cents more than its closest Saudi peer, Arab Light. On the back of subdued bitumen demand in East Asia and overall difficulties of placing heavier barrels there, Basrah Heavy saw a steeper cut of 40 cents per barrel, to a -1.30 USD per barrel discount to Oman/Dubai. Somewhat surprisingly, SOMO ended up being more aggressive on its European pricing than Saudi Aramco itself, cutting differentials by 15-40 cents per barrel compared to May. Assessing the Iraqi grades one by one present an illustrative picture of how SOMO sees its European exports in the near term. 

Source: SOMO.

Basrah Medium, the former Basrah Light, has continued to enjoy buying interest from European refiners and it is indeed Medium that was decreased more than Basrah Light and Heavy - in both Northwest Europe and the Mediterranean Basrah Medium surpasses Arab Heavy, despite being of better quality. On the other hand, the Basrah Light OSP (nominally a 33-34 API grade) has narrowed in on Arab Medium in NW Europe - only 35 cents per barrel separate the two in June 2021 - a margin that would most probably eaten up by the real-life quality difference between the two grades. Market rumors indicate that the recently revamped Basrah Light has been unable to stick to the stipulated quality, all the while the previous quality (de)escalation scale was scrapped. Perhaps SOMO would be better-advised to split its European pricing across the NWE and the Mediterranean, just as Saudi Aramco and NIOC are doing. 

Source: NIOC.

Amidst increasing volumes of Iranian crude remain idled in Southeast Asian waters as floating storage, most probably in expectance of a sudden delivery surge, the Iranian national oil company NIOC made only marginal changes from the previous month. Asia-bound loadings of Iran Light and Heavy were cut by 10 and 15 cents per barrel, respectively, to premia of 1.5 and 0.5 USD per barrel against the Oman/Dubai average. Thus, NIOC sticks to its 2021 trend of keeping Iranian Light 20 cents per barrel cheaper than Arab Light. The Iranian NOC has also extended its hand to (prospective) European buyers, cutting Northwest Europe differentials by 50 and 70 cents per barrel for Iranian Light and Heavy (in the Mediterranean the month-on-month changes were lower, 20 and 30 cents per barrel from May). All this is to indicate that Iran will be serious about ramping up European exports should the Vienna nuclear talks bear fruit anytime soon. 

By Gerald Jansen for Oilprice.com

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