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Gerald Jansen

Gerald Jansen

Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands.

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Will Banking Fears Force Middle East Producers To Cut Prices?

  • There have been no indications OPEC+ is looking to jointly cut production following the U.S. banking crisis.
  • Overall exports from Saudi Arabia have been declining for several months, indicating that talks of robust demand growth might have been exaggerated.
  • The difference between Saudi Arabia’s lightest and heaviest grade is now slightly above $4 per barrel, in January the spread stood at almost $9 per barrel.

The banking collapses that have sapped confidence in oil markets and brought oil prices closer to the $70 per barrel mark have been followed with great interest across the Middle East. For the first time in many months, flat prices were close to fiscal breakeven level as countries like Bahrain, Algeria or even Oman are now asking themselves if balancing the budget is a manageable task. There is no indication that OPEC+ will act, however, should prices slip even lower on the heels of another banking crisis, the likes of Saudi Arabia or even the UAE might be prompted to at least express their readiness to cut. Talking of cuts, after several months of decreasing formula prices for Middle Eastern producers, prices into April were on the up. In the case of Asia, NOCs were buttressed by the widening in the Dubai cash-to-futures spread which rose to $2.00 per barrel, meaning they had all the right reasons to hike.   Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).

Source: Saudi Aramco.

In recent public utterances Saudi Aramco top officials remained upbeat about global oil demand growth in 2023 and reiterate that spare capacity to produce more crude is shrinking, which should see the price-setting clout of the Saudi NOC increase over time. Benefitting from the changes in the futures curve as well as solid refining margins in Asia, Saudi Aramco increased the April selling prices for most of its Asian grades. Arab Super Light is the only exception, with its April OSP down $1.00 per barrel to a $4.95 per barrel premium to Oman/Dubai, whilst the heaviest grade on offer, Arab Heavy, was hiked by $2.50 per barrel, whizzing into positive territory vis-à-vis the Middle Eastern medium sour benchmarks (despite its technically worse quality). As the world’s most voluminous oil grade Arab Light only got a $0.50 per barrel hike from March, the tendency in Saudi pricing has resolutely been towards a shrinking light-heavy spread. The difference between Saudi Arabia’s lightest and heaviest grade is now slightly above $4 per barrel, in January the spread stood at almost $9 per barrel.

Related: Drop In U.S. Gasoline Prices Likely To Be Temporary

Chart 2. Saudi Aramco’s Official Selling Prices for US-bound cargoes (vs ASCI).

Source: Saudi Aramco.

Overall exports from Saudi Arabia have been declining for several months, indicating that talks of robust demand growth might have been exaggerated, especially seeing the state of purchasing activity in Europe and the Americas. After showing great promise in late 2022, exports into Europe have consistently been a good 10-15% lower since. Considering Poland now makes up 40% of all imports into Europe, core demand from Northwest European refiners has been on par with 2021 levels. Nevertheless, Saudi official selling prices into both Northwest Europe and the Mediterranean were hiked month-on-month, with once again Arab Heavy lifted the most, by $1.30 per barrel in both regions. As Saudi flows to the United States have shrunk to just 300,000 b/d, a third of what they were 10 years ago and lower than COVID-hit levels seen over 2020-2021, Saudi Aramco obstinacy to change US pricing is continuing, with all four exportable grades rolled over from March and Arab Heavy still being priced at a $6 per barrel premium to ASCI.

Chart 3. ADNOC Official Selling Prices for 2017-2023 (set outright, here vs Oman/Dubai average).

Source: ADNOC. 

The successful IPO of ADNOC’s gas unit, raising $2.5 billion for a 5% stake in the business, buoyed the appetite of the national oil company of the United Arab Emirates, and even though negotiations on its buying of international trading company Gunvor have stalled, there is still a lot to come from ADNOC this year. When it comes to official selling prices for April, February trading of Murban on the IFAD exchange led to a slight increase in the outright price of the grade, coming in at $83.36 per barrel compared to $82.63/bbl in March. Whilst the UAE’s lighter grades Umm Lulu and Das have witnessed only marginal changes, being rolled over and hiked by 15 cents per barrel, respectively, the market value of medium sour Upper Zakum has been markedly improving. Following a buying spree from Chinese state-owned companies in January-February, with them buying almost 20 million barrels of Upper Zakum on the spot market, the grade has been hiked to a $1.20 per barrel discount to Murban, the narrowest since December 2021.

Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai).

Source: SOMO.

It is frequently said that Saudi Arabia was the big winner of 2022, with high oil prices lifting its GDP growth to 8.7% and providing Saudi Aramco with a $161 billion net profit tally, however Iraq has also benefited greatly from the hydrocarbon windfall. The recent court ruling of the International Chamber of Commerce which sided with Baghdad in its claim against Turkey (for allowing Kurdish exports to happen without the consent of Iraqi authorities), triggering a halt in Kurdish exports as the Turkish port of Ceyhan is now demanding explicit Iraqi approval to load, can be seen as yet another resounding victory for Baghdad. Simultaneously, Iraq is also changing from within as the state oil marketing company Somo has nonchalantly fired its CEO and replaced him with Ammar Abdal al-Anbagi. This is all to show that Iraq is changing, time will show whether it is for the better or for the worse. 

Chart 5. Middle Eastern medium sours into Europe (vs Dated Brent and ICE Bwave).

Source: SOMO. 

When it comes to Iraqi formula prices into April 2023, Somo continues to chart a slightly different course from Saudi Aramco. This time around Somo hiked Basrah Medium by $0.95 per barrel to a slight -$0.15 per barrel discount to Oman/Dubai, which is slightly more than Arab Medium, whilst the heavy sour Basrah Heavy was lifted by $1.95 per barrel, less than Arab Heavy. Trading at a -$3.90 per barrel discount to Oman/Dubai, the fact that Basrah Heavy is getting more expensive is good news for the Iraqi budget, too, as exportable volumes of the lighter and sweeter Basrah Medium (though still quite heavy and sulphurous by any international yardstick) will be shrinking when the 140,000 b/d Karbala refinery starts up. The Iraqi state oil marketer lifted European prices more than Saudi Aramco, up by $1.25 and $1.75 per barrel for Basrah Medium and Basrah Heavy, respectively, with its sentiment buoyed by solid demand from Greece, Turkey and the Netherlands, with the tree accounting for almost 80% of Europe’s total demand. 

Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).

Source: NIOC.


When it comes to Iran, the most notable development has been the re-establishment of diplomatic relations between Tehran and Riyadh, brokered by China. Long-time foes after years of being embroiled in a quasi-proxy war in Yemen as well as other hotspots across the Middle East, the unexpected normalization of ties could allow for a rapid revival in security cooperation, trade and bilateral investment. The Chinese-brokered deal also means that the geopolitical premium in the Persian Gulf will now subside as tankers are less likely to be harassed and Yemeni missile attacks will become less likely (very important for Saudi Arabia considering how close its new refinery in Jizan is to the Yemeni border). For April-loading cargoes, the Iranian national oil company NIOC decided to toe Saudi Aramco’s line and hiked its Asian prices by $0.50 and $0.90 per barrel for Iran Light and Iran Heavy, respectively. With exports now stably above the 1 million b/d mark, Iran is well-placed for the gradual return of Chinese demand even if it continues to rely overwhelmingly on the Asian powerhouse’s purchasing interest. 

Chart 7. Kuwait Super Light Crude Official Selling prices, compared with Arab Extra Light (vs Oman/Dubai average).
Source: KPC.

Kuwait has been standing out amongst Middle Eastern oil-producing countries, for it was generating mostly negative headlines over the past weeks. The never-ending political deadlock got more entrenched with the reappointment of a former prime minister and the annulment of 2022 elections, then an oil spill in the western part of the country led KPC to declare a state of emergency. As dour as things might look currently for KPC, the good news seem to be just around the corner – oil exports in March have finally dropped, a sign that the country’s much-anticipated Al Zour refinery is closer to a full commissioning. Amidst all this, Kuwait’s state oil company KPC has hiked the April OSPs of Kuwait export crude into Asia by $0.75 per barrel, 15 cents less than Aramco’s Arab Medium, taking the spread between the Kuwaiti and Saudi medium sour grade to its widest since May 2020. Whilst shrinking availability should suggest better pricing, it might happen that Kuwait sees the exact opposite until it fully recalibrates its exports. 

By Gerald Jansen for Oilprice.com

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