Less than a month following the announcement of OPEC+ production cuts, oil prices have gone back to where they were before. As difficult as it is to fathom the real-time concerns of the oil group, in case the output target curtailments were a deliberate measure to maintain a pricing range of 70-80 per barrel in the midst of severe macroeconomic headwinds, it worked. In case the expectation was that prices would stay high for longer, then the overall effect has dissipated relatively quickly. For Middle Eastern pricing in May 2023 the OPEC+ production cut nevertheless created ideal conditions. For Asian OSPs specifically, the decision to voluntarily lower production targets by 1.66 million b/d could be seen as more than offsetting the flattening of the Dubai cash-to-futures marker in March.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average). Source: Saudi Aramco.
As said above, when Saudi Aramco was expected to issue formula prices for May, the ultimate question was what kind of an imprint the OPEC+ production cuts would leave on OSPs. The Dubai cash-to-futures spread, usually used as a marker of the upcoming pricing changes, decreased to $1.50 per barrel last month, almost $0.50 per barrel lower than in February, whilst product cracks have been weakening over the past weeks. So, barring the OPEC+ cut, everything was suggesting there should be a cut for Asian prices, however Saudi Aramco used the opportunity nicely and did the exact opposite, hiking all Asia-bound OSPs by $0.10-0.50 per barrel. As has become a tradition lately, the heaviest available grade Arab Heavy was increased the most, with its May formula price moving to a $1.25 per barrel premium over Oman/Dubai which is quite a peculiar phenomenon, considering both Oman and Dubai are lighter and sweeter.
Chart 2. Saudi Aramco’s Official Selling Prices for US-bound cargoes (vs ASCI). Source: Saudi Aramco.
Saudi Arabia’s love-hate relationship with the United States continues as prices into the United States for May-loading cargoes were hiked again. The odd thing about this is that exports from the Middle Eastern nation to the US have anyways declined to a mere 200,000 b/d, equivalent to a more than 50% drop compared to last year, so one would think there is no additional reason to rub it in, demand for Saudi crude is already at a low point in the US. However, with the current changes a cargo of Arab Heavy into the US would be priced at a $6.50 per barrel premium to ASCI which again is quite peculiar given that the likes of Mars or Poseidon are lighter and sweeter than the Saudi grade. Related: In A World First, California Bans New Diesel Truck Sales From 2036
Chart 3. ADNOC Official Selling Prices for 2017-2023 (set outright, here vs Oman/Dubai average). Source: ADNOC.
Compared to Saudi Arabia’s 500,000 b/d production cutting pledge, the 144,000 b/d that the United Arab Emirates promised to shut in seem much easier to manage, especially seeing the headwinds that UAE grades have been facing recently. Oil exports hit 3.2 million b/d last month, the highest since April 2020, however with the likes of Upper Zakum no longer wielding appealing discounts as they did two months ago, Asian interest in Emirati crudes has been on the decline. There is no better proof of this than the spectacular plummeting of the Middle East’s very own light sweet benchmark Murban which has been trading on par with Dubai in the second half of April.
Consequently, with IFAD Murban trades in March setting the May 2023 official selling price at $79.55 per barrel, down almost $4 per barrel compared to the April price, the Murban-Dubai spread recorded its fourth consecutive month-on-month drop and is set for another one into June 2023. As for other grades which are set as a differential to Murban, both Das and Upper Zakum were brought closer to Murban as pricing moves into May, seeing their respective differentials narrow to -$0.95 and -$1.10 per barrel.
Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai). Source: SOMO.
As has become the tradition with the Iraqi state oil marketer SOMO, its formula prices for Asia-bound cargoes do not fully mirror Saudi Aramco. Whilst both Arab Light and Arab Medium were hiked into May, Iraq’s medium sour flagship Basrah Medium was rolled over from the previous month, staying at a -$0.15 per barrel discount to Oman/Dubai. As Saudi Aramco keeps on increasing the OSPs of Arab Heavy, there is already a $1.40 per barrel difference between the Saudi heavy grade and Basrah Medium, marking yet another oddity in the world of Middle Eastern pricing. Such caution might reflect wider Iraqi fears that the unprecedented influx of Russian crude into India might be displacing Iraq and even though the same is happening to Saudi Arabia, too, SOMO does not have that many strategic partnerships abroad that it can rely on in times of weaker demand. At the same time, the Asian OSPs of Basrah Heavy were hiked by $0.50 per barrel compared to the April discount of -$3.90 per barrel to Oman/Dubai, so at least the heavier side of things is shaping up to be more profitable.
Chart 5. Iraqi selling prices for Europe-bound cargoes (vs Dated Brent).Source: SOMO.
Whilst many were expecting that SOMO would start a revolution with its May formula prices for Europe, the reality turned out to be quite non-controversial as Basrah Medium and Basrah Medium were hiked by $0.15 and $0.60 per barrel, respectively. The main reason behind the market jitters is the situation in the Turkish port of Ceyhan which has last loaded a cargo of Kurdish crude on March 24, with exports halted ever since. Whilst Baghdad and the Kurdish regional government in Erbil have already settled their disputes and stipulated the way forward, Turkey does not want to resume loadings, having been ordered to pay $1.5 billion for exporting crude without Iraq’s approval (and that fine might potentially double as the fine only covers 2014-2018 and the arbitration court has a concurrent case pending for the 2018-2023 period). Resulting in widespread upstream shut-ins across Iraqi Kurdistan, the integration of Kurdish barrels into the larger pool of Kirkuk exports is still yet to happen.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average). Source: NIOC.
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As has become customary with Iran’s national oil company NIOC, the OSPs have appeared only very late in the month, three weeks after Saudi Aramco published its May formula prices. It is puzzling that NIOC perseveres in doing so, considering its main competition now is coming from Russia and not Saudi Arabia. Be that as it may, the May formula price for Iranian Light to Asia was increased to a $2.80 per barrel premium to Oman/Dubai, exactly the same as Saudi Aramco’s Arab Light, marking the third consecutive month when NIOC aims for parity. The relationship between Riyadh and Tehran is much different now to what it used to be, seeing the Saudi king being invited to Iran and the latter’s President Ibrahim Raisi urging to normalize relations as swiftly as possible, preferably even before the Hajj starts in late June. Whilst Iran remains dependent on China for its exports, the volumes that it has been supplying remain above the 1 million b/d threshold, indicating that NIOC keeps on boosting its revenue stream.
Chart 7. Kuwait Export Crude official selling prices into Asia, compared with Arab Medium and Iranian Heavy (vs Oman/Dubai average). Source: KPC.
Kuwait followed in Saudi Arabia’s footsteps with its May pricing, keeping European prices intact and slightly hiking OSPs to Asia. However, the May price of its main export blend, Kuwait Export Crude (KEC), was hiked by $0.25 per barrel to a $2.40 per barrel premium vs the Oman/Dubai average, slightly less than for Arab Medium and Arab Light. Whilst it seems unlikely that Kuwait Petroleum knew it at the time, but crude availability did increase over the course of April so it made sense to be less aggressive with pricing. The ill-fated Al Zour refinery is the main reason for the April rebound in Kuwaiti oil exports because the first crude distillation unit of the refinery was shut for two weeks this month and judging by the timid press releases coming from KPC it seems that the alleged technical issues remain a pain point and that refinery continues to operate at partial capacity. Confirming this, product exports from Kuwait have plummeted back to figures last seen late last year.
By Gerald Jansen for Oilprice.com
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There are, however, concerns that the collapse of a few American commercial banks could develop into a global banking or financial crisis. If not for these concerns, oil prices would have been by now heading upward with Brent crude projected to hit $90 a barrel during the first half of 2023 and touch $100 before the end of the year. Barring a global banking crisis, Brent can still make it.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert