The spike in oil prices to the highest level in more than a year worked wonders for the Middle East. Saudi Aramco is back to buying minority stakes in private Chinese refiners, enjoying the fact that oil prices have been more than $10 per barrel above its presumed fiscal breakeven for quite some time, offsetting the losses incurred before OPEC+ production cuts. Apart from boosting the Middle East’s fiscal “stability”, the Saudi production cuts of recent months have also greatly steepened Dubai backwardation, with the cash-to-futures-spread of the middle sour benchmark moving to almost $3 per barrel lately. The month-on-month change in Dubai amounted to $0.55 per barrel, setting the stage for another increase in formula prices. Usually, the likes of Saudi Aramco or SOMO also look at refining margins and August was perhaps the most profitable month for refiners in all of 2023, driven by resurgent diesel and gasoline cracks.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
In an environment like this, Saudi Arabia’s national oil company Saudi Aramco was expected to hike Asian prices by a solid margin. Surprisingly, the anticipated OSP increase did not happen. Saudi Arabia’s medium sour grades were hiked by $0.10 per barrel each, moving Arab Light to a $3.60 per barrel premium vs Oman/Dubai. In fact, the only Saudi grade that saw a notable increase in October was Arab Super Light, a very rare condensate-like grade that sees 1-2 cargoes per month, that was hiked by $0.50 per barrel. Overall, the lack of pricing ambition reflected wider worries about the health of Chinese demand into the remaining months of 2023, as well as significantly lower Indian nominations lately. India’s imports of Saudi crude are set to come in at the lowest monthly level in almost a decade, below 500,000 b/d. Considering Saudi Arabia sets the tone for other countries’ price-setting, the temptation to raise Asian formula prices was most certainly there. Related: Oil, Gas Drilling Dips To February 2022 Low As Oil Prices Hover Near 2023 Highs
Chart 2. Formula prices of cargoes bound for the United States (vs Argus Sour Crude index).
Source: Saudi Aramco.
Saudi Aramco also lowered formula prices for its European customers, both Northwest Europe and the Mediterranean witnessed every single grade cut by $0.10 per barrel compared to September OSPs. Whilst the small Asian hikes were a surprise, the market anticipated minor month-on-month decreases in Europe where spot-traded differentials have been on the decline for several weeks already. Apart from demand concerns, one of the possible explanations for such considerate pricing into October might come from higher availability of Saudi crude. If anything, this month has already seen Saudi exports add 300-400,000 b/d compared to August and even against the background of stagnant output this trend might continue further down the road. Overall, the US was the only market to see its formula prices lifted, this time around by a uniform $0.20 per barrel, putting the OSP of Arab Light at a whopping $7.45 per barrel premium to the Argus Sour Crude index.
Chart 3. ADNOC Official Selling Prices for 2017-2023 (set outright, here vs Oman/Dubai average).
Source: ADNOC.
ADNOC, the national oil company of the UAE, has been active both in and out of the oil markets, putting in final touches for the COP28 summit in Dubai in two months as well as launching new seawater treatment facilities for its onshore production. When it comes to pricing, however, the country’s light sour Murban benchmark has strengthened slightly compared to Dubai, though remaining a fraction of the $3-4 per barrel premiums seen earlier this year. The outright price of Murban for October-loading cargoes increased by $6.5 per barrel compared to September, ticking in at $87.28 per barrel. Somewhat surprisingly the differential of Upper Zakum, a grade that is very Dubai-like in terms of its quality, was lowered by 60 cents per barrel after being sold at parity to Murban in September. With almost two-thirds of all Upper Zakum cargoes going towards China, the lower differential might reflect a weaker Chinese pull over the upcoming months.
Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai).
Source: SOMO.
The interplay between Saudi Arabia and Iraq has been one of the most interesting trends to watch lately in the wider Middle Eastern region. Iraq’s national oil marketer SOMO went for the opposite of Saudi Aramco did and hiked Asian formula prices by $0.40 per barrel for Basrah Medium and by $0.30 per barrel for Basrah Heavy. With this, the spread between Arab Light and Basrah Medium has shrunk to $1.80 per barrel, the first time this year that it’s below the $2 per barrel mark. The decline in India’s buying of Saudi crude reflects this pricing rivalry well, with discounted Russian barrels becoming the baseload for many Indian refiners who then decide between Iraqi and Saudi prices as to who should be their main Middle Eastern oil supplier. At the same time, Iraq’s oil exports into Asia ultimately hinge on two main buyers – India and China – that collectively account for 85% of Asian deliveries, so if either of those two would cut purchases, Baghdad would need to find new clients very quickly.
Chart 5. Iraqi selling prices for Europe-bound cargoes (vs Dated Brent).
Source: SOMO.
As for Europe, the meteoric rise in Dated Brent has become something of a problem for Iraq. In contrast to Saudi Arabia, Iraqi formula prices for European buyers are not benchmarked against ICE Brent but against Dated, which has been consistently $1.1-1.2 per barrel above the futures contract. The strength of Dated Brent is the main reason why the cut in Iraq’s European prices is significantly bigger than for Saudi Arabia, as SOMO lowered the October OSP by $0.50 and $0.40 per barrel for Basrah Medium and Basrah Heavy, respectively. Maintaining Iraq’s European market became an issue of principle after August witnessed the highest ever volumes of Iraqi exports towards the European continent, just shy of 1 million b/d (the second highest this year was at “only” 820,000 b/d), so SOMO wanted to let it regional buyers know that it understands their concerns about Dated Brent. Such a strategy might also backfire, should Dated suddenly slump back to parity with ICE Brent, as was the case for most of the summer months.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).
Source: NIOC.
ADVERTISEMENT
The state coffers of Iran added some 6 billion after the US-Iran prisoner swap allowed Tehran to finally tap into its funds that were frozen in South Korean banks. When it comes to Iran’s exports, however, there has been no change whatsoever with NIOC fully focusing on the Chinese market to maximize its exports. Despite it being a rather academic exercise as Iranian cargoes are mostly sold at double-digit discounts to Dubai on a spot basis, NIOC hiked the October formula price of Iran Light to Asia by $0.05 per barrel to a $3.50 per barrel premium vs Oman/Dubai, even lower than Saudi Arabia.
Iran’s energy authorities have spent most of the summer months playing up the opportunities of the Middle Eastern country’s oil production, however it seems that we will not be seeing further increases beyond the 3.2 million b/d that Tehran self-allegedly produces already. Exports from Iran remain rangebound around 1.4-1.5 million b/d, with record high fuel consumption at home prompting Iran’s oil sector to maximize refinery runs instead of exporting it as unrefined crude. In 2023 alone, the Middle Eastern country’s gasoline demand increased by 70,000 b/d to a record 730,000 b/d, on the back of last year’s exceptional 110,000 b/d demand surge. Whilst Tehran also boasted of increasing the processing capacity of the largest condensate splitter in the country, Persian Gulf Star, to 455,000 b/d thanks to debottlenecking, the increase in refining capacity has so far lagged gasoline demand growth.
Chart 7. Kuwait Export Crude official selling prices into Asia, compared with Arab Medium and Iranian Heavy (vs Oman/Dubai average).
Source: KPC.
Kuwait continues its transformation from a crude-focused exporter into an all-round market player, with its products offering finally boosted by the third CDU of the 615,000 b/d Al Zour refinery coming onstream. The downstream expansion has not been going to plan, with many hiccups, the latest of which was a power outage that debilitated the Mina al-Ahmadi and Mina Abdullah refineries mid-month. For its October formula pricing, Kuwait’s national oil company KPC opted for a middle ground between Saudi Arabia’s minimal price hikes and Iraq’s following market indications that led to them hiking OSPs much more. The Kuwaiti benchmark grade Kuwait Export Crude for the Asian market was increased by $0.20 per barrel vs Oman/Dubai compared to September OSPs. Even though Kuwait remains exclusively focused on the Asian oil markets with no exports to Europe whatsoever, KPC’s cuts for potential European buyers exceeded others’ price changes, lowering the October OSP by a whole $1 per barrel for both Northwest Europe and the Mediterranean. However, because they remain $4-5 per barrel more expensive than Iraq’s Basrah Medium (which is also priced off Dated Brent), these changes are unlikely to have any tangible effect.
By Gerald Jansen for Oilprice.com
More Top Reads From Oilprice.com:
- Analysts Raise Oil Price Forecasts As Market Tightens
- Oil Prices Set For Another Weekly Gain Despite Falling Back
- Will We See $100 Oil In October?
