Gerald Jansen

Gerald Jansen

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

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By Gerald Jansen - Jun 26, 2023, 11:00 AM CDT

  • Saudi Arabia’s pledge of reducing its crude output by 1 million bpd in July, has so far been nothing short of a fiasco.
  • Saudi Arabia set the trend earlier this month by hiking OSPs to Asia.
  • Declining refinery margins prompted Asian refiners to cut runs in May and June, lowering demand for oil.

One of the most drastic production cuts of the past years, Saudi Arabia’s pledge of reducing its crude output by 1 million b/d in July, has so far been nothing short of a fiasco. Oil prices are now lower than they were in late May, Chinese demand has still not done wonders to the still-bearish sentiment in the oil markets and US interest rate hikes are still widely expected to happen. For oil producers, frightening to imagine what would have happened if the OPEC+ meeting ends with no production pledge at all. When most Middle Eastern nations were setting their formula prices for July, the suspense was still alive, prices could have gone either way – up or down. Fundamentals suggested prices to Asia should be lowered and prices to Europe should be hiked. In case of the former, the Dubai cash-to-futures lost some $0.65 per barrel between April and May, a situation aggravated by weak refining margins. However, exploiting the Saudi production cut and the unpredictability of markets, July OSPs to Asia went up again, much to the chagrin of regional refiners. 

Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average). Source: Saudi Aramco.

As we have already noted above, were it not for Saudi Arabia’s 1 million b/d production cut in July, the Middle Eastern kingdom’s official selling prices would have gone down in Asia, its core market. Backwardation no longer being steep as it was, refinery margins decreasing with time, record volumes of Russian and Iranian barrels in key Asian economies, all of that was indicating prices should be cut. But the unilateral production pledge changed the dynamics, with a notable chunk of the Middle East’s medium sour barrels to be taken off the market. Saudi Aramco published its July formula prices shortly after the OPEC+ meeting, hiking Asian OSPs by $0.45 per barrel across-the-board. Seeing Arab Light at a $3.00 per barrel premium to Oman/Dubai in a market that so far exhibited very little promises of immediate strength, Chinese refining majors have reportedly cut their Saudi term volumes by a combined 10 million barrels, however, that is still only equivalent to a third of the 1 million b/d cut. 

Chart 2. Formula prices of cargoes bound for Northwest Europe by selected grades (vs ICE Bwave).Source: Saudi Aramco.

Saudi formula prices to European customers were less surprising, even if they, too, came with a notable month-on-month increase. All grades going towards the Mediterranean were hiked by a uniform $0.60 per barrel, lifting Arab Light to a $2.50 per barrel premium to ICE Brent. The OSP increases for buyers in Northwest Europe were even more pronounced, there Saudi Aramco went for a $0.90 per barrel hike. Consequently, the July formula price of Arab Heavy in NWE stands at a $0.10 per barrel premium to ICE Brent, the first time in history that Saudi Arabia’s heaviest grade is priced at a premium to Brent. As for the United States, Saudi Arabia’s troubled pricing relationship with US refiners is likely to worsen on the back of several US environmental groups asking the Biden administration to ban oil imports from the Middle Eastern kingdom, arguing Riyadh is proactively stymieing the development of a fossil-free future. Saudi formula prices for US customers were hiked $0.90 per barrel, bringing all grades a solid $6-7 per barrel above their historical trading range.  

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

Official selling prices for the crown jewel of the United Arab Emirates, its light sweet benchmark Murban, are set by IFAD Murban exchange, leaving the Emirati national oil company ADNOC with little leverage to manually adjust July OSPs. The Murban selling price was set at $75.59 per barrel, down $8.52 per barrel compared to June. What’s worse, the spread between the higher-value light sweet Murban and Dubai, historically the Middle Eastern medium sour benchmark, shrank to its lowest in two years at $0.50 per barrel. However, Murban is only part of a larger story – all spot-traded Middle Eastern grades have been suffering throughout May and early June. Declining refinery margins prompted Asian refiners to cut runs, lowering demand for oil. Consequently, the spot premium of Qatari Al-Shaheen to Dubai dropped below $1 per barrel for the first time since early 2021, whilst spot Upper Zakum weakened to such a level that it might trigger another Chinese round of buying soon. 

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

Iraq has so far been navigating the tumultuous waters of pricing dilemmas with commendable restraint, however Saudi Arabia’s 1 million b/d cutting pledge put Baghdad in a very difficult position. After all, it was not cutting output itself, however needed to react to Saudi Aramco’s pricing hike and a generally shrinking medium sour pool. The outcome was something of a consensus solution, hiking Asian formula prices by a mere $0.05 per barrel – not going the full way of a $0.45 per barrel Saudi increase but steering clear of pricing cuts reflecting the slackening backwardation and weak refining margins. Consequently, the July OSP of Basrah Medium to Asia is still at a discount to Oman/Dubai (-$0.10 per barrel), widening the gap between Iraq’s medium sour flagship and Saudi Arabia’s Arab Light to more than $3 per barrel. 

Chart 5. Iraqi selling prices for Europe-bound cargoes (vs Dated Brent).Source: SOMO. 

For the third consecutive month, Kurdish exports from Ceyhan remains shut. According to Kpler, the last cargo sailed away from the Turkish port on March 30, since then there has been no activity in Kurdish exports. Even though Iraqi and Turkish negotiators have resumed negotiations, presumably halted because Turkey was holding presidential elections in May and the outcome would have dictated two different scenarios depending on who wins, a prospective deal now feels even more difficult to achieve than previously. Angering Erbil, the federal authorities in Baghdad have introduced two last-minute amendments to the 2023-2025 federal budget, determining the state oil marketer Somo as the sole responsible for selling Kurdish crude and limiting the time that the KRG needs to pay back its debts from seven to five years. Hence, it’s hardly surprising Somo rolled over the Kirkuk formula price for July, still at a -$0.30 per barrel discount to Dated, whilst Basrah Medium and Basrah Heavy were lifted by $0.25 per barrel and $0.45 per barrel, respectively.  

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

For most of 2022 and even 2023, Iran’s nuclear programme and oil exports were of secondary interest to big politics, however Tehran has been making a comeback recently to global headlines. Amidst news that the US has resumed indirect talks with Iran on the latter’s nuclear enrichment capacities, Tehran’s oil exports have been just as peculiar, exceeding the 1.5 million b/d mark for the first time since the JCPOA collapsed in November 2018. A lot of those cargoes are going to Malaysia/Singapore, but in reality, Iran’s oil export bonanza is a result of Chinese refiners seeking out the most profitable barrels out there and cutting down on whatever is expensive. 

The current export pace is twice as high as last year’s numbers, also showing that NIOC now has the producing capacity to ramp up output, too. Even though Iran’s official formula prices do not reflect the real prices that Chinese buyers pay, state oil company NIOC decided to tow the Saudi pricing line and raised the OSP of Iran Light to Asia to the same $3.00 per barrel vs Oman/Dubai as Arab Light. What is more, even its month-on-month changes in Europe have seen the same increments as Saudi Aramco, which might mean Tehran is getting increasingly confident with how the Asian market is developing recently. 

Chart 7. Kuwait Super Light Crude official selling prices into Asia, compared with Arab Extra Light (vs Oman/Dubai average).Source: KPC.

As Kuwait saw another political reshuffle with the swearing in of its seventh government in three years, the Middle Eastern kingdom’s long-running goal of increasing its refining to the detriment of oil exports nevertheless continues to move ahead. With two-thirds of the Al Zour refinery now firing on all cylinders and the third CDU coming up soon, Kuwait’s exports have shrunk to 1.5 million b/d, some 300,000 b/d lower than last year. Even though Kuwait’s national oil company KPC usually follows in the footsteps of Saudi Aramco with its Asian pricing, this time around it found it hard to mirror it fully. Therefore, July formula prices were hiked by $0.25 per barrel compared to June, taking the premium over Oman/Dubai to $1.95 per barrel, 50 cents lower than Arab Medium. 

The bifurcation in pricing strategies extended into Kuwait’s other grade, too. Not the largest export stream by any means, Kuwait’s Super Light crude has nevertheless become one of the most coveted parts of the Middle East’s portfolio. Initially assessed above Saudi Aramco’s Arab Extra Light, Kuwait’s light grade has now fallen to its lowest on record against its Saudi peer after KPC hiked its July OSP by $0.35 per barrel to a $2.15 premium vs Oman/Dubai, widening the AXL-KSLC spread to $0.40 per barrel. 

By Gerald Jansen for

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Gerald Jansen

Gerald Jansen

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

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