The Middle East has been steadily reaping the benefits of its oil bounty throughout 2022, arguably one of the most successful years for the region at large in its recent history. Yet the prospects for next year are by no means as rosy. The global economy is in disarray, with the double whammy of a strong US dollar and high inflation starting to impact oil demand, and perhaps most importantly, China is still not out of the woods. Most Middle Eastern exporters have recorded their highest-ever differentials in 2022, however the downward-facing trend started with November formula prices and continued with December OSPs might go on for longer than previously thought. The Dubai M1-M3 spread has dropped by $0.75 per barrel month-on-month in October, setting the scene for price cuts. This month is poised to see another decline in the Dubai cash-to-futures spread, roughly $1.5-$2.0 per barrel. Considering that by now the first three months of 2023 are all in contango for Dubai futures, it would be fair to say that steeper cuts in formula prices are unavoidable for the Middle East's oil powerhouses.
Chart 1. Saudi Aramco's Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco. In line with the weakening Dubai structure and refining margins, Saudi Aramco has cut formula prices for December-loading cargoes going to Asia. Even though neither gasoline nor naphtha indicated any semblance of strength recently, Saudi Aramco raised the December OSP of Arab Extra Light by $0.10 per barrel month-on-month to a $6.35 per barrel premium to Oman/Dubai. Given that no one really anticipated such a move, it might signal less availability of the lighter Saudi barrels, potentially hinting at the flows that Aramco would be cutting first. With all the other grades, Saudi pricing was reflecting changes in the Dubai curve. Arab Light, the largest crude stream globally, was reduced by $0.40 per barrel, whilst Arab Medium saw a more drastic reduction of $0.80 per barrel compared to November. Related: UAE To Cut Oil Supply To Asia By 5% In December
Chart 2. Saudi Aramco's Official Selling Prices for Europe-bound cargoes (vs ICE Brent).
Source: Saudi Aramco.
Understanding that December formula prices should already reflect a new European reality, one without available Russian crude, Saudi Aramco knew it was time for a much-needed hike. Following two consecutive month-on-month cuts, this time around all grades were moved higher by 0.20-0.80 per barrel, with the notable exception of Arab Medium which was simply rolled over from November. One would think that with December 05 kicking in so soon, there would be robust demand from European refiners towards Saudi barrels. However, we are still to see any signs of that as several NW European refineries nominated zero Saudi cargoes for December, relying on a more regional slate. Meanwhile, the silent war waged on US deliveries continues as December formula prices saw yet another roll-over, keeping all grades at the record highs reached earlier. When it comes to Saudi compliance with OPEC+ production cuts, all available data seems to suggest that Riyadh is doing most of the heavy lifting. Not only did its production drop to 10.8 million b/d as of October 2022, but its crude exports have also seen a dramatic decline from some 7.5 million b/d in August-September to as little as 6.9 million b/d currently.
Chart 3. ADNOC Official Selling Prices for October 2022 (set outright, here vs Oman/Dubai average).
Source: ADNOC.
As the Murban official selling price for December is formed by the monthly average of October trading at the IFAD exchange, the Emirati light sweet benchmark came in at $93.53 per barrel. Following three straight month-on-month declines, the Murban differential to Dubai has started to strengthen again, reflecting the increasingly saturated medium sour market whilst the physical availability of lighter grades might become an issue. For December, that premium stands at $2.45 per barrel, up $1 per barrel from this month's pricing, and might see further growth going into January 2023 as exports of Murban continue to trend sideways since September. With time, the ADNOC-set discounts of Upper Zakum, the Emirati medium sour grade, are gradually mirroring those of Dubai - the December OSP was lowered by $1.10 per barrel to a $2.80 per barrel discount to Murban. The other two Emirati grades, Umm Lulu and Das, have been rolled over from November, for the second time in a row.
Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai).
Source: SOMO.
The pricing policy of Iraq has seen very little change to Saudi Arabia, lowering the price of Basrah Medium and Heavy going to Asia by $0.80 and $1.15 per barrel, respectively, compared to November 2022 OSPs. Having done so, the Iraqi medium sour flagship Basrah Medium is still looking strong when compared to regional peers - even when compared to Saudi Arabia's heaviest marketed grade Arab Heavy, Basrah Medium is $0.35 per barrel cheaper next month. SOMO understands this and has cut its December formula prices by the same extent that Saudi lowered Arab Medium, a grade which is generally lighter and sweeter than Basrah Medium which often boasts a quality different from its nominal quality specifications. Meanwhile, Iraqi oil exports have been trending down so less Middle Eastern oil on the market might also be a driver in SOMO's decision making. At the same time, in the specific case of Iraq lower exports might be linked to its new refinery in Karbala starting up commercial operations, a feat it shares with its southern neighbour Kuwait.
Chart 5. Iraqi Official Selling Prices for Asia-bound cargoes (vs Dated Brent).
Source: SOMO.
SOMO usually publishes its formula prices a week after Saudi Aramco and the additional waiting time led to the Iraqis hiking their December OSPs into Europe by $0.7-$1.05 per barrel month-on-month. Perhaps involuntarily, SOMO has found itself in a position when its pricing for Europe has a huge competitive edge over Saudi Aramco's. The thing is that Aramco's formula prices are based off ICE Brent, whilst the Iraqi state oil marketer has traditionally relied on Dated Brent - and the two have switched places recently with the immediate Brent CFDs firmly in contango territory. Given that recession concerns have been weighing on market sentiment for quite some time, the first steps towards a contango market are not surprising per se. That being said, the ubiquitous gloom and doom still feel overwhelmingly driven by China's promised and subsequently forfeited opening.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).
Source: NIOC.
Iran's national oil company NIOC kept its pricing changes in line with trends set by Saudi Aramco, cutting prices for Asia and increasing them for Europe. The latter is still an academic exercise because the overwhelming majority of Iranian exports is still being shipped to China. As for Asia-bound formula prices, Iran Light was cut slightly less than Arab Light (down by $0.30 per barrel to a $5.35 per barrel premium to Oman/Dubai), however once again we need to point out that Iranian official pricing does not reflect real prices out there, which are heavily discounted. Whilst Iranian nuclear talks were widely expected to resume after the US midterm elections, under the current geopolitical environment that is highly unlikely to happen. Not only have deliveries of Iranian drones to Russia roiled the feathers of the Biden Administration, the IAEA's most recent report that found Tehran's nuclear capacities at the Fordow site to be dangerously close to weapons-grade enrichment has curbed Western willingness to engage in diplomacy for months, if not years.
Chart 7. KEB Official Selling prices for Asian cargoes, compared with regional peers (vs Oman/Dubai average).
Source: KPC.
Keeping its Kuwait Export Blend crude in lockstep with Arab Medium, KPC lowered its December 2022 OSP into Asia by 80 cents to a $3.20 per barrel premium to Oman/Dubai. Given that historically KEB was always discounted to Arab Medium (and since May 2022 that discount has evaporated, either trading at parity or a couple of cents above), this trend might see a further continuation now that Kuwaiti exports are squeezed by the country's downstream needs. By far the best news for Kuwait this month is the launch of product exports from the Al Zour refinery. Inaugurating the new refinery's capacity (at least that of its first train), it was first a naphtha cargo sailing towards Asia, soon followed by cargoes of VLSFO and jet fuel. After months of struggle to coordinate the start-up of respective units, years of cost overruns that brought Al Zour's total cost to $16.2 billion, this might bring some respite to Kuwait's oil industry. Crude exports have already reacted accordingly, with November exports falling to 1.65 million b/d, reflecting the roughly 200,000 b/d capacity of the commissioned refining unit.
By Gerald Jansen for Oilprice.com
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Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands. More