As the OPEC+ meeting in the first days of February only confirmed the oil group is intent on maintaining its strategy and will avoid sudden and drastic moves, Saudi Arabia was facing a peculiar dilemma with its March 2023 official formula prices. In the weeks before OSPs get usually released, there has been an incessant stream of surveys, opinion pieces and news claiming Saudi Aramco should cut prices into Asia. The oddity of the situation was that there wasn't really any indication as to why formula prices ought to be cut. The cash-to-futures spread of the Middle Eastern Dubai benchmark were tiptoeing in the same place they were a month ago, around $1.20 per barrel, and even more importantly refinery margins were improving as Chinese product exports started to get scaled down after the frenzy of late 2022, a sign of domestic consumption in China slowly but surely bouncing back to pre-pandemic levels. Hence, when Saudi Aramco did issue its March 2023 OSPs, hiking Arab Light into Asia by $0.20 per barrel to a $2.00 per barrel premium to the Oman/Dubai average, the immediate reaction of many market observers was shock and awe, even though the Saudis were following their usual rulebook.
Chart 1. Saudi Aramco's Official Selling Prices for Asian Cargoes (vs Oman/Dubai average). Source: Saudi Aramco.
Whilst there was a lot of expectation that Saudi exports to Europe would increase after the 5 December Russia oil price cap, the opposite happened. After a really strong showing in November, hitting the highest level since the unbeatable all-time high of 1.3 million b/d in April 2020, exports continue to edge downwards. Whilst Saudi Aramco had its reasons to increase formula prices into Europe, after all backwardation did flatten in January, the $2.00 per barrel month-on-month increase for all grades in both Northwest Europe and the Mediterranean might prompt some European buyers to reconsider their Saudi purchases for the time being. Talking of higher prices, OSPs into the United States were also hiked after several months of uneventful roll-overs, with Arab Light, Medium and Heavy all adding $0.30 per barrel compared to February prices. Seeing that the US Gulf Coast has stopped buying Saudi barrels and that the remaining exports are going into PADD 5 refineries that have much more limited options than PADD 3. Related: U.S. Oil Drilling Activity Retreats For Second Week In A Row
Chart 2. Saudi Aramco's Official Selling Prices for US-bound cargoes (vs ASCI).Source: Saudi Aramco.
Generally speaking, there has been a notable discrepancy between the US oil market and the European or Asian markets. WTI remains the only benchmark to remain in contango in its front months, whilst both Dubai and ICE Brent are increasingly widening their month-on-month backwardation. Oddly enough, open interest held in WTI contracts has gone up in the same form and fashion as it had for ICE Brent, however in the case of the former it failed to alter sentiment about the spring months. Moreover, the release of additional 26 million barrels of US SPR stocks, most probably to materialize in April-May, put WTI under a great deal of pressure, meaning that Middle Eastern exporters that send their barrels into the US over the upcoming month are going to see their pricing basis depressed, leading to lower revenues.
Chart 3. ADNOC Official Selling Prices for March 2023 (set outright, here vs Oman/Dubai average). Source: ADNOC.
ADNOC, the national oil company of the United Arab Emirates, has been a little bit all over the place recently. The IPO of its gas business when 5% will be sold for more than $2.5 billion, the appointment of its CEO Sultan Ahmed al Jaber as the head of COP28 climate talks have somewhat overshadowed the company's oil activities which are still going strong. Keeping oil exports around 3 million b/d and maintaining a solid market share in Asia with only very limited exposure elsewhere, ADNOC headed into March 2023 formula prices with the promise of a higher baseline. Murban traded on the ICE Abu Dhabi exchange forms the basis of ADNOC prices and March came in $2.50 higher than last month, setting the OSP at $82.63 per barrel. With the other grades calculated at manually set discounts to Murban, the light sweet Umm Lulu was rolled over at a 0.05 per barrel premium whilst Das was marginally cut to a -$1.45 per barrel discount to the UAE benchmark.
The cheapest Emirati grade, the medium sour Upper Zakum which up until this month has been priced lower than Dubai itself (despite being lighter and sweeter) has become something of a market sensation as Chinese state-owned refiners ramped up purchases to levels barely seen. In both January and February Unipec, the trading arm of China's state-controlled refiner Sinopec, bought at least 15 cargoes of the grade on the spot market. As is usually the case with market opportunities that are too good not to exploit, the buying spree pushed spot differentials of Upper Zakum higher and now its spread to lighter grades like Das or Murban is narrowing down, to the extent that the grade's April OSP is now above the regional benchmark Dubai.
Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai). Source: SOMO.
The vast fleet of Russian tankers sailing into India and pushing Iraq's medium sour exports out of the South Asian country have been giving Iraqi policymakers many sleepless nights. How to react to something that emerged so suddenly yet might remain in place for months if not years? Where could Iraq find new buyers in Asia and at what cost? Judging by February volumes, India and China are buying below 2022 average levels, both taking in some 900,000 b/d. March formula prices reflect these concerns as the state oil marketer SOMO lifted the Asian prices of Basrah Medium and Basrah Heavy by $0.30 and $0.10 per barrel, respectively, so that now their formula prices stand at discounts of -$1.10 and -$5.85 per barrel to Oman/Dubai. For reference, Saudi Aramco increased the formula price of its Arab Heavy grade which is heavier than Arab Medium by $0.50 per barrel from February, highlighting the squeeze on Iraqi export barrels.
Chart 5. Iraqi Official Selling Prices for Europe-bound cargoes (vs Dated Brent).Source: SOMO.
Whilst Asian demand remains an open question for Iraq despite its prices being more competitive than Saudi Aramco's, Europe is gradually waking up to the Iraqi option. Apart from the usual buyers in Greece and Turkey that have long-term contracts for Basrah Medium, the Netherlands started buying sizable volumes of Iraqi crude again, with more than 210,000 b/d departing last month (equivalent to six tankers), the highest monthly reading since September 2018. In a way, this should have happened as Dated Brent, the pricing basis for Iraqi OSPs into Europe, has flipped into a discount to ICE Brent, used by Saudi Aramco. So SOMO is chasing a moving target - when Aramco increases the European price of Arab Heavy by $2.00 per barrel compared to February, the Iraqi state oil marketer does the same for Basrah Medium yet there remains a hefty $3 per barrel difference between the two. Ultimately, Basrah Medium remains cheaper than Arab Heavy, even though its quality is better.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).Source: NIOC.
For Iran, the likelihood of seeing the JCPOA revived remains close to zero, nevertheless, amidst all the uranium enrichment taking place there are still occasional calls for a comprehensive deal. Amidst all this, Iranian exports continue flowing into China uninterrupted, easily maintaining flows above 1 million b/d. The Iran-China relationship was expected to witness another boost when President Ebrahim Raisi visited Beijing earlier this month, however initial expectations soon simmered down as official communiques were palpably light on energy-related matters. Therefore, it seems that Iran's national oil company NIOC will have to continue doing what it has been the past year, maximizing profits against all odds. In terms of pricing, NIOC followed the Saudi lead and increased Iran Light by 20 cents to a $2.00 per barrel premium over Oman/Dubai, mirroring Arab Light, whilst Iran Heavy was hiked by 60 cents to a $0.35 per barrel premium vs Oman/Dubai.
Chart 7. Kuwait Export Blend Official Selling prices, compared with Arab Medium and Iran Heavy (vs Oman/Dubai average). Source: KPC.
As Kuwait continues to struggle with the Al Zour refinery, still having only one train operational out of the three available, the exports of the Middle Eastern Kingdom remain unchanged at 1.75-1.8 million b/d. Traditionally relying on Saudi Aramco pricing directions, the national oil company KPC increased the March 2023 OSP of its flagship Kuwait Export Crude (KEC) by $0.35 per barrel to a $1.40 per barrel premium vs Oman/Dubai. The month-on-month increase is the average of the month-on-month increments of Arab Light ($0.20 per barrel) and Arab Medium ($0.50 per barrel), which makes sense considering that quality-wise it's somewhere in between the two. Whilst KPC works towards the full commissioning of Al Zour, it is simultaneously eyeing the possibilities that the shared Neutral Zone between Saudi Arabia and Kuwait might provide. The two major fields that are currently producing there, the offshore Khafji and the onshore Wafra, have a nameplate production capacity of 550,000 b/d, however, currently they are producing barely half of that level as the multi-year hiatus has adversely impacted their potential.
By Gerald Jansen for Oilprice.com
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Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands. More
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