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Gerald Jansen
Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands.
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By Gerald Jansen – Dec 26, 2022, 5:00 PM CST
China’s reopening to fuel bullishness in oil markets in early 2023.
Saudi Aramco has cut its January-loading cargoes for most export destinations, reflective of the overall decline in flat prices and weakening differentials for spot trade.
Basrah Medium is now almost $3 per barrel cheaper than Saudi Arabia’s Arab Medium.
Middle Eastern OSPs – December 2022 The oil markets have come full circle. In a year that saw the Russia-Ukraine war disrupt crude flows across the globe, oil supply tightness bring backwardation to it steepest in history and China’s coronavirus lockdown hamper Asian demand, we are back to Brent trading around the $80 per barrel mark, almost exactly where this 2022 started. This is certainly good news for refiners who can now procure cheaper feedstock, however for Middle Eastern heavyweights still also presents a dilemma, especially now that China’s opening is in doubt amidst soaring infections that forced Beijing to stop reporting COVID numbers. As we head into the first month of 2023 in an ambivalent environment where supply tightness and recession fears pull the markets in different directions, let’s look at the trading strategies of Middle Eastern nations.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
Saudi Aramco has cut its January-loading cargoes for most export destinations, reflective of the overall decline in flat prices and weakening differentials for spot trade. For Asia, the decision to cut the OSPs was widely expected, after all the Dubai cash/futures spread narrowed to $2.75 per barrel last month, an almost $2 per barrel decrease from October. In doing so, the Middle Eastern benchmark grade has followed in the footsteps of Brent and WTI, both of which have flipped into contango in the past couple of weeks. Dubai is still backwardated, though judging by this month’s trajectory of the same cash/futures spread another deep formula price cut might be inevitable into February 2023. Anyways, formula prices for the upcoming month were lowered by -$1.10 to -$2.50 per barrel, with the notable exception of Arab Extra Light which saw no changes at all. Arab Light, the most important grade in terms of marketed volume, was cut by a whopping $2.20 per barrel and at a $3.25 per barrel premium it is back to where it was around March.
Chart 2. Saudi Aramco’s Official Selling Prices for US-bound cargoes (vs ASCI).
Source: Saudi Aramco.
For the second consecutive month, Saudi Aramco rolled over its US prices and keeping them at record high levels. With this, the unwritten policy of no formula price decreases remains in place since November 2021, with next month marking the fifteenth straight month without any downward revision. Aramco’s US pricing is based off Argus Sour Crude Index (ASCI) quotes, which have narrowed considerably in September but have plummeted since, meaning that it is highly unlikely the Saudi NOC will ease its pricing policy towards the United States. Consequently, even in January 2023 Arab Light and Arab Medium will be priced at a $6.35 and $6.15 per barrel premium to ASCI. Ironically, even without shipping costs towards the US Gulf Coast (quite the expense nowadays) medium sour Saudi grades have been consistently more expensive than the US light sweet benchmark WTI.
Chart 3. ADNOC Official Selling Prices for January 2023 (vs Oman/Dubai average).
Source: ADNOC.
The decline in oil prices has also negatively impacted Murban, the crown jewel of the UAE’s pricing policy. As November exchange trades brought the monthly average to $90.90 per barrel, down almost $3 per barrel from the previous month, Murban can’t help declining amidst the overall slump with IFAD Murban trending a good $10 per barrel lower this month, setting the stage for another decline into February 2023. On the other hand, after months of relatively weak light end cracks the Murban-Dubai spread rose to $4.75 per barrel last month. The weakness of medium sours has impacted Upper Zakum, set by ADNOC as a differential to Murban, as it sunk to a $5.20 per barrel discount to the flagship grade, down $2.40 per barrel compared to December. This is the lowest Upper Zakum has ever been priced, potentially triggering a lot of renewed buying across Asia. Meanwhile, ADNOC continues to invest heavily into reserve production capacity, the company’s general meeting approved plans to reach the 5 million b/d capacity target by 2027 (instead of the previously announced 2030 goal). For this, ADNOC expanded its capital investment budget for the next five years to 150 billion, aiming to ramp up simultaneously both oil and gas.
Chart 4. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai).
Source: SOMO.
Iraq has been one of the main benefactors of the 2022 oil price madness, with its real GDP increasing by 8% this year, mostly driven by a 12% rise in crude production happening amidst elevated global prices. The IMF is expecting Baghdad to run a 6% fiscal surplus this year, one of the best readings in the country’s history. Iraq has also managed to overcome initial discrepancies in terms of its oil policy with the new prime minister contradicting the oil minister on Baghdad’s acceptance of OPEC+ production targets – by now, these are largely settled and Iraq is back to being a staunch advocate of supply discipline. Having spent most of 2022 pursuing a less assertive pricing policy than most of its Middle Eastern peers, the Iraqi state oil marketer SOMO cut the official formula prices for its January-loading cargoes going into Asia by $1.40 and $1.80 per barrel for Basrah Medium and Basrah Heavy, respectively. This keeps Basrah Medium almost $3 per barrel cheaper than Saudi Arabia’s Arab Medium, so there’s still a lot of leeway for Iraq to cut less than it would be expected.
Chart 5. Iraqi Official Selling Prices for Europe-bound cargoes (vs Dated Brent).
Source: SOMO.
Touted by many as Iraq next region of export growth, Europe has been a mixed blessing for Iraq. On the one hand, the EU sanctions on Russian crude are set to provide new opportunities, especially in the Mediterranean where many refineries were built to refine Iraqi barrels. On the other hand, after a brief surge in June-July export volumes to Europe have been subdued so SOMO has failed to capitalize on the emerging opportunity so far. Confronted with this puzzle, the Iraqi state oil marketer has lowered formula prices again, setting the January 2023 OSP for Basrah Medium at a $9.90 per barrel discount to Dated Brent, the lowest ever differential on record. The situation is similar with Basrah Heavy, the other major Iraqi grade, which was cut by $1.50 per barrel to a whopping discount of -$14.75 per barrel to Dated Brent, once again the lowest ever differential. From this one can infer that Baghdad is trying really hard to attract European interest, we shall see if the return to mid-2022 exports will materialize.
Chart 6. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).
Source: NIOC.
The Iranian national oil firm NIOC took an unusually long time publishing its official selling prices for January, almost three weeks after Saudi Aramco did so. At the same time, its prices mirror those of the Saudi NOC perfectly – Iran Light to Asia was lowered by $2.20 per barrel to a $3.15 per barrel premium to Oman/Dubai (exactly the same as Arab Light), whilst Iran Heavy was cut by $1.10 per barrel (the same as Arab Medium). NIOC might just as well stop publishing its formula prices, considering how little effect it has on actual deliveries to China. Even though discounted, Iranian deliveries to China in recent months have surpassed the 1 million b/d mark for the first time in the post-sanctions period. Simultaneously, Venezuela has also become an organic part of Iran’s exports as the Latin American country has grown to rely on Iranian condensate as diluent for its heavy production which has also been on the increase. With US President Biden saying the JCPOA deal is dead, but the White House would not be announcing it, Iran’s reliance on China will remain of paramount importance.
Chart 7. KSLC Official Selling prices, compared with Arab Extra Light (vs Oman/Dubai average).
Source: KPC.
Kuwait’s January-loading OSPs have followed Saudi Aramco’s suit, with the state oil company KPC cutting the formula prices of KEC into Asia by $1.10 per barrel to a $2.10 per barrel premium to Oman/Dubai, exactly where Arab Medium stands currently. Exports to Europe or to the United States have been non-existent for quite some time, so it’s the Asian OSPs that have any real impact. The first crude distillation unit of the Al-Zour refinery has reached full operations following first exports of diesel and jet fuel witnessed in November, and this has already decreased the availability of Kuwaiti crude exports, a trend that will continue over the upcoming months as the remaining two distillation units come online. The recently introduced light sweet grade coming out of Kuwait, KSLC, was only marginally cut to a $6.50 per barrel premium to Oman/Dubai, though volumes remain relatively tiny for it to have a sizeable market impact.
By Gerald Jansen for Oilprice.com
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Gerald Jansen
Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands.
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