Caution has given way to the overly optimistic sentiment of late 2020, with most energy agencies cutting their estimates of 2021 crude demand. According to an industry consensus, global crude demand will increase by 5.5-6mbpd, implying that a full return to pre-COVID demand levels will require several years to take place. The underlying question whether crude output levels can actually follow this demand growth this year has been growing in importance, steep backwardation on the Brent curve might suggest has serious qualms about it. With divergent trends abounding, Middle Eastern national oil companies have opted for nuance after the January-February price increases. As usual, Saudi Arabia has led the way, rolling over all of its February 2021 OSPs into March completely unchanged.
Graph 1. Spreads for Brent-M1, Brent-M2 and Brent-M3 in 2020-2021 (USD per barrel).
Source: S&P Global Platts.
The robustness of Asian demand remains a key gauge for Middle Eastern NOCs. China and India have been leading the continent with fuel consumption almost returning to pre-COVID levels in both. On the other hand, insular economies such as the Philippines, Indonesia or Taiwan have been running their refineries below maximum capacity or temporarily halting several units amidst poor margins. At the same time, turnaround season is just around the corner and Japan’s month-on-month import drop in February is the first of many to come. Albeit smaller in terms of overall output, refinery maintenance in Thailand, Taiwan and Sri Lanka will also tighten the markets a bit. February turnaround will blaze the path for next month’s large-scale works, China alone will have at least 0.9mbpd of refinery capacity going offline in March 2021.
If one is to aggregate all the push and pull factors impacting Middle Eastern pricing, not changing anything seemed like the ideal way forward, after all even the cash Dubai futures spread has barely moved from December 2020. Moreover, Aramco’s pledge to cut its total production by 1mbpd implies a two-month period of duration (February/March) and considering the palpable price surge, with quotes close to Riyadh’s fiscal breakeven of $68 per barrel, there was no reason to jeopardize it. Thus, Saudi Aramco and the Kuwaiti KPC have rolled over their entire grade portfolio destined for Asia, whilst the Iraqi SOMO and the Emirati ADNOC have made marginal alterations to February 2021 OSPs – the former has hiked Basrah Light and Basrah Medium by 5 and 10 cents per barrel, respectively, the latter has decreased the value of Upper Zakum by 5 cents, to a 0.75 premium over the Oman/Dubai average. Related: Biden Sets The Stage For An Offshore Wind Energy Boom
Graph 2. Saudi Aramco Oficial Selling Prices for Northwest Europe in 2018-2021 (vs ICE BWave).
Source: Saudi Aramco.
The precipitous fall of Urals, triggered by the enhancement of the February loading programme and a tangible decline in the grade’s Asian demand, has somewhat counterintuitively nudged Saudi Aramco to commit to a much more aggressive pricing policy on the European front. The extent of Aramco’s audacity has surpassed the actual depreciation of Urals which at the time of the OSP issuance stood at $-0.6/barrel to Dated in the Baltics and $-0.2/barrel to Dated Brent in the Mediterranean. The Saudi NOC has hiked its March 2021 prices for Northwest Europe for all its marketed grades by $1.40 per barrel (FOB Ras Tanura basis), the Mediterranean-bound cargoes saw a $1.30 per barrel month-on-month increase.
Graph 3. Saudi Aramco OSPs for US-Bound Cargoes in 2018-2021 (vs Argus Sour Crude Index).
Source: Saudi Aramco.
Interestingly enough, crude exports from Saudi Arabia to the United States witnessed a sudden upswing in January 2021, with 7 cargoes (5 VLCCs and 2 Suezmaxes) departing from the Middle Eastern kingdom. The monthly total of US-bound crude hit an 8-month high (12 MMbbls) after a gradual decline has almost completely dried up an export stream that at its peak around 2014-2015 went as strong as 1.3-1.4mbpd. Moreover, there might be a natural inclination to assume that most of the barrels went to US refiners on the Pacific coast, however exactly half of it went to USGC, Texas and Louisiana to be specific. Against this background, Aramco has committed to a 10 cent-per-barrel across-the-board increase for all grades with its March 2021 official selling prices.
Graph 4. SOMO official selling prices in 2017-2021 (vs Oman/Dubai average).
Source: SOMO.
As mentioned above, the Iraqi SOMO has made only marginal changes to its Asian OSPs. Its European prices, however, show significantly more nuance as Basrah Light and Kirkuk were hiked by 90 cents per barrel from February, whilst Basrah Heavy and Basrah Medium witnessed steeper increases of $1 and $1.1 per barrel, respectively. All of this is lower than Aramco’s aggressive European pricing – such circumspection might be explained by SOMO’s willingness to reconquer some bits of its European market share as it continues to drift towards increasing dependence on South and Northeast Asia. Its concurrent halving of the European freight escalator (a pricing tool it employs to incentivize certain destinations) by 15 cents per barrel would certainly corroborate this claim.
Graph 5. Iraqi Official Selling Prices for Europe-Bound Cargoes in 2018-2021 (against Dated Brent).
Source: SOMO.
Basrah Light, once a favorite among Mediterranean refiners hitting around 0.5mbpd in average monthly imports into Europe, has all but disappeared from the European market after SOMO’s quality recalibration (0.07mbpd for January loaders). Moreover, although one of the declared objectives of splitting the Basrah streams into 3 was to calibrate their quality to the respective needs of customers, the buyer’s pool of Basrah Medium remains quite narrow up to now. Represented across the heretofore loaded 15 cargoes, Basrah Medium was shipped to four countries – China, India, Greece and the United States. One Basrah Medium cargo arriving to the Texas Gulf Coast is all the more interesting as Californian refiners continue to import their usual routine of 3 Basrah Light cargoes per month. Related: Is The Caribbean Ready For An Oil Boom?
Graph 6. NIOC official selling prices in 2017-2021 (agains the Oman/Dubai average).
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Source: NIOC.
In stark contrast to all other Middle Eastern oil producers, Iran still waits for a political breakthrough vis-à-vis its dealings with the United States. Although Teheran claims it can ramp up production from its current level of 2mbpd to 3.8mbpd within several months from the sanction’s lifting, the imminence of a thaw with Washington is by no means confirmed. Therefore, NIOC continues to refrain from sharp moves and largely follows the line championed by Saudi Aramco, albeit with a certain sense of moderation. Thus, the official March selling prices for Asia-bound cargoes were all rolled over from February with the exception of Iranian Light that was hiked by 5 cents to a +0.85 per barrel premium against the Oman/Dubai premium. This marks the 3rd consecutive month that IRL is at a discount to Arab Light, despite being better qualitatively.
Graph 7. ADNOC official selling prices in 2017-2021 (against the Oman/Dubai average).
Source: ADNOC.
The Emirati ADNOC was the only Middle Eastern NOC that decreased its March 2021 OSPs, by eliminating Upper Zakum’s quality to the benchmark grade Murban (Das, Umm Lulu and Murban itself were rolled over from February 2021). On the one hand, weaker demand in the upcoming 1-2 months may push spot prices below the stipulated threshold, on the other hand ADNOC’s curtailment of its term commitments (Murban and Upper Zakum by 15%, Das by 20%) will counteract the downward pressure. It should be noted that whilst the significance of China as an importer of UAE crudes seems to be somewhat faltering after a temporary high point in December 2020, India-bound cargoes loaded in January 2021 have attained the second-highest aggregate ever (21.5 MMbbls, equivalent to 0.695mbpd).
By Viktor Katona for Oilprice.com
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