Having enjoyed a strong third quarter with Brent prices averaging 86 per barrel, the oil producer countries of the Middle East are now facing a much direr outlook into the winter. Over the past month, oil prices have shed some $10 per barrel and WTI even started to see contango as market sentiment soured. The Asian market, traditionally accounting for the majority of Middle Eastern exports, has so far been immune to contango, nevertheless Dubai futures have started to react to weaker Chinese buying, higher inflows of US or Russian crudes, leading to a much narrower backwardation curve than we have gotten used to recently. Understanding this might be the last month of pricing hikes before the winter season inevitably corrects market differentials to the downside, OPEC heavyweights settled on different pricing strategies.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average). Source: Saudi Aramco.
The combination of still widening backwardation and weakening refining margins has led to a pricing dilemma for Saudi Aramco. The Dubai cash-to-futures spread rose by $0.27 per barrel compared to the September average, however, how to quantify gasoline or fuel oil cracks falling? The decision for the Asian markets was a compromise of sorts as the largest Saudi grade by volume, Arab Light, was plainly rolled over at a $4.00 per barrel premium to the Oman/Dubai average. Saudi Aramco’s light and heavy flagship grades, Arab Extra Light and Arab Heavy, were lifted by $0.70 and $0.30 per barrel, respectively, trying to avoid a scenario whereby term buyers avoid Arab Light and focus on cheaper grades. Following five consecutive month-on-month increases for Arab Light, primarily due to the ever-steepening backwardated futures curve of Dubai, it seems that from January 2024 onwards Saudi Aramco would have no other option other than cut its formula prices, the relatively robust pull on Saudi barrels from China or South Korea notwithstanding.
Chart 2. Formula prices of cargoes bound for Northwest Europe by selected grades (vs ICE Bwave). Source: Saudi Aramco.
In Europe, the downward pressure on Saudi Aramco has already prompted a marked recalibration of prices. The December formula price for every single grade going to Northwest Europe was cut by $2.30 per barrel, whilst every Mediterranean-bound price was lowered by $1.90 per barrel, reflecting a region-wide decline in differentials. Whilst the pricing move into December is substantial, it is highly unlikely it would be the last. The country’s flagship Arab Light is priced at a $4.90 and $4.40 per barrel premium to ICE Bwave for Northwest Europe and the Mediterranean, respectively. Seeing how all the other medium sours in Europe have been going down, with Norway’s Johan Sverdrup or Brazil’s Tupi already trading at discounts to Dated Brent, the upcoming months should see further cuts in European pricing. For US customers formula prices were left unchanged, with Arab Light and Arab Medium still at record highs of $7.45 and $8.15 per barrel above the Argus Sour Crude Index, and there seems to be very little change for Saudi Aramco’s US clients.
Chart 3. Kuwait Super Light Crude official selling prices into Asia, compared with Arab Extra Light (vs Oman/Dubai average). Source: KPC.
Just as Saudi Aramco reported a 23% decrease in Q3 profits to $32.7 billion, aggravating fiscal deficits in Saudi Arabia. Kuwait is facing its own budgetary constraints as the new 2023-2024 budgets is expected to come in at a $22 billion deficit of its own. Whilst historically KPC would naturally mirror the pricing decisions of Saudi Aramco with its flagship Kuwait Export Crude having almost identical quality parameters to Arab Medium, looking into this December the Kuwaiti NOC slashed its Asian prices by $0.20 per barrel, ending up at a $2.85 per barrel premium to Oman/Dubai. Kuwait continues to struggle with bringing its new 615,000 b/d Al Zour refinery to full nameplate capacity, with November once again seeing a disruption in refining after the forced shutdown of almost all units at the refinery due to fuel gas feed valve dysfunction. Lower refinery runs have prompted a rebound in Kuwaiti crude exports, potentially even moving back to 1.6 million b/d, the highest pace of exports since May 2023.
Chart 4. ADNOC Official Selling Prices for 2017-2023 (set outright, here vs Oman/Dubai average). Source: ADNOC.
Ever since the UAE’s national oil firm ADNOC started to price its term cargoes based on the IFAD Murban futures contract, it has swapped places with Saudi Aramco and is now the first Middle Eastern NOC to publish formula prices. As things started to get increasingly worse in November, the pricing of ADNOC reflects only the initial concern of weakening demand and flattening backwardation, rolling over the formula differentials of Umm Lulu, Das, and Upper Zakum from last month. The formula price of Murban itself is determined as the monthly average of front-month IFAD Murban trading, with the October average coming in at $91.00 per barrel, almost $3 per barrel lower than last month. Whilst in outright terms Murban dropped lower, the Murban-Dubai spread widened last month to $1.73 per barrel, almost $1 per barrel higher than in October, a sign of robust demand towards the UAE light sour grade. Even regardless of weaker refining margins across Asia, Murban is set for a downward correction very soon as January-February 2024 will see much more of the grade exported into the markets due to ADNOC carrying out a winter turnaround at the Ruwais refinery, with higher availability already weighing on IFAD trades in November.
Chart 5. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai). Source: SOMO.
The Iraqi state oil marketing firm Somo has cut its formula prices across the board for December-loading cargoes, most probably reflecting a much more bearish outlook for the oil markets. The largest Iraqi export grade Basrah Medium, accounting for roughly two-thirds of all exports and some 2.2 million b/d this year to date in outright terms, witnessed a $0.30 per barrel drop for Asian loadings compared to November, bringing the grade to a $1.80 per barrel premium over Oman/Dubai. Considering that Saudi Aramco rolled over Arab Light and slightly cut Arab Medium, SOMOwidened the spread between its grades and Saudi ones. Moreover, after nine consecutive month-on-month increases for Iraq’s heavy sour flagship Basrah Heavy, the December OSP was lowered by $0.20 per barrel, taking the grade back to a $1.60 per barrel discount to Oman/Dubai, its formula price from October.
Chart 6. Selected Middle Eastern medium sour grades (vs Oman/Dubai). Source: SOMO.
In contrast to its Asian pricing, SOMO cut European prices tangibly less than its Saudi peer, lowering the December OSP of Basrah Medium and Kirkuk by $1.00 per barrel, whilst Basrah Heavy saw a $1.20 per barrel decrease compared to November formula prices. As Iraqi exports to Europe are still priced off Dated Brent and Saudi Aramco relies on ICE Bwave, the pricing dynamics differ reflecting the varied dynamics of the physical and futures markets in Europe. The past weeks have seen a resumption of negotiations between Iraq’s oil ministry and the Kurdish Regional Government, raising hopes that shut-in production from Iraqi Kurdistan might finally find its way to the global markets after a more than 8-month-long hiatus.
The federal authorities of Iraq would still need to find a settlement with international oil companies that produce oil in Kurdistan and are still owed money by the KRG, however at least the Baghdad-Erbil axis seems to be nearing a settlement soon. As things stand currently, the European formula price of Kirkuk stands at a $0.75 per barrel premium to Dated Brent, whilst the similar-quality Basrah Medium sells at a $2.15 per barrel discount, indicating there is a notable spread between the two. In times of elevated freight prices those differences might fade but if freight is to become cheap again, the temptation of the European refiners would be to go with the longer-haul (and cheaper) Basrah Medium.
Chart 7. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average). Source: NIOC.
The Israel-Palestine conflict has changed the outlook for Iran’s oil industry, with the Biden administration now openly pledging to bring the Middle Eastern country’s exports down, vowing to enforce Iranian sanctions much more proactively. Iran’s oil minister Javad Owji has countered the threats by saying the country’s crude production reached 3.4 million b/d, the highest reading since the November 2018 re-introduction of sanctions vis-à-vis Tehran, although the sharp drop in Iranian oil exports seen last month seem to render that claim highly unlikely. In the meantime, Iran’s national oil firm NIOC its own formula prices for December-loading cargoes, slightly increasing Asian prices by $0.15 and $0.05 per barrel for Iran Light and Iran Heavy, respectively. Even though Iran sells its crude to China at heavy discounts, the signaling is very straightforward – NIOC is not afraid to hike prices even more than other Middle Eastern peers would. With Iranian exports set to rebound in November after a weak October result, US pressure seems to have only a marginal impact so far on Iran’s export capabilities.
By Gerald Jansen for Oilprice.com
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