Things are getting worse in the Middle East. Asia, the largest demand hub so far for Saudi Arabia, Iraq and the United Arab Emirates, appears to be in the same weakening phase as Europe and the US in the spring. They are not buying enough oil, their oil inventories are depleting and oil prices are generally expected to fall further before recovering. There is perhaps no better example to illustrate this than China. China was supposed to lead the demand recovery in the summer but has bought the least amount of oil this year as seaborne imports have fallen to 10 million barrels per day. These general trends of weaker demand and a weak real economy have inevitably impacted the Middle East futures market, with the Dubai spot-to-futures spread falling 60 cents per barrel compared to May, averaging just $0.95 per barrel. With refinery margins struggling to rise any further (and to be fair, they haven’t fallen either), the market was bracing for big price cuts for August-loading cargoes across the Middle East.
Figure 1. Saudi Aramco’s official selling prices for Asian cargoes compared to Oman/Dubai average.
Source: Saudi Aramco.
Saudi Aramco did exactly what was expected. Having already cut its formula prices for July loading, the company cut its Asian OSPs across the board. The lighter grades Arab Extra Light and Arab Light were cut by 60 cents per barrel, while the heavier grades Arab Medium and Arab Heavy were revised even more sharply downward to 70 cents per barrel. This essentially returned Asian formula prices to May price levels, with Arab Light trading at a $1.80 per barrel premium to Oman/Dubai and Arab Medium priced at $1.25 per barrel above the benchmark. The price decline was largely due to very few nominations from long-term buyers. Total volumes departed for China in June averaging just 1.15 million barrels, the lowest monthly nominations since the month when the impact of COVID-19 first became fully felt in March 2020, while India loaded just 530,000 barrels in June, a three-year low. Although both countries expanded interest rate hikes in July, sentiment remained weak and Saudi Aramco had to respond.
Related: OPEC: Oil is vital to electrifying the world
Figure 2. Formula prices by selected grades for Saudi Arabian cargoes to Northwest Europe (compared to ICE Brent).
Source: Saudi Aramco.
Compared to Asia, where purchases did not experience any noticeable weakness until June this year, Europe was already one step ahead. Price differentials had generally collapsed in Europe before then, and were recovering strongly towards the summer. Saudi Aramco managed to raise its August formula price to Europe by a significant (and across the board) 90 cents per barrel. By not lowering prices when regional price differentials were collapsing, and raising prices when conditions were right, Aramco managed to raise its European OSPs to their highest since December 2023. Arab Light is trading at a $4 per barrel premium to ICE Brent, and even Arab Heavy is trading at a premium to the European futures benchmark. This may seem unusual in the spring, but it has been well received in the summer. In fact, market reports show that all European long-term contract holders have specified full monthly volumes for August, suggesting that demand for medium-sour crude remains high despite the higher prices.
Figure 3. Kuwait export blend official selling prices to Asia compared with Arab medium and Iranian heavy (compared to Oman/Dubai average).
Source: KPC.
Kuwait does not necessarily share Saudi Arabia’s concerns and fears. After all, the main reason for the significant decline in the country’s exports over the past few years is due to the country’s refining. Not only is the 615,000 b/d Al-Zour refinery running at full capacity, but so is Oman’s 230,000 b/d Duqm refinery, with which Kuwait National Oil Company cooperates. Despite being equally reliant on Korea, China and Vietnam as major contracting partners, KPC has followed Saudi Aramco’s lead and lowered the Asian formula price of Kuwaiti export crude by 70 cents per barrel, bringing it to $1.25 per barrel higher than the Oman/Dubai average. Even the extra light KSLC grade, which is relatively small in volume terms as KPC loads three tankers a month on average, was discounted by 60 cents per barrel compared to July’s OSP, perfectly in line with Arab extra light.
Meanwhile, Kuwait has recorded perhaps its biggest oil discovery in years, claiming some 2.1 billion barrels of light oil and 5.1 trillion cubic feet of natural gas in its offshore Al Nohata field. With Kuwait allocating a $300 billion upstream investment budget to boost production capacity but lacking any high-impact greenfield projects to undertake, the field could mark a milestone in the Middle East country’s long-term goal of increasing its crude oil production capacity to 4 million barrels per day.
Figure 4. ADNOC official selling prices 2017-2024 (direct here compared to Dubai).
Source: ADNOC.
As is customary, it was Abu Dhabi’s national oil company ADNOC that stirred up the pricing storm in the Middle East, and August (again) brought no particularly encouraging news. Not bad at all. The monthly average price of Murban traded on the IFAD exchange was $82.52 per barrel, down $1.41 per barrel compared to July’s price. Murban is still valued slightly higher than Dubai swap, but nowhere near the spectacular levels it was a year or two ago. Murban’s price woes are mainly due to a significant build-up of Murban stocks in the market, which has led to a surge in light sour oil exports of 1.3-1.4 million barrels per day since the beginning of the year and have remained high ever since. ADNOC’s refinery flexibility project, aimed at pumping heavier oil into the domestic refining system, has finally come to an end, albeit at the expense of Murban’s past premium. The UAE oil tycoon also raised prices of Upper Zakum (UZ), the country’s answer to Saudi Arabia’s Arab Light, to parity with Murban after it had been trading at a slight premium to Murban for several months, but ADNOC decided to respond after seeing demand for UZ weaken in the Dubai trade.
ADNOC is increasingly diversifying its portfolio towards gas. Indeed, the biggest announcement to come out of the UAE in July was for the planned 9.6 million tonnes per year Ruwais LNG export terminal. Western oil majors TotalEnergies, Shell and BP, as well as Japan’s Mitsui, have all acquired 10% stakes, with Shell and Mitsui also signing long-term supply agreements. Gas appears to be at the forefront of the UAE’s strategic growth following ADNOC’s natural gas-focused acquisition in Mozambique in May this year and its planned acquisition of Australian upstream company Santos.
Figure 5. Iraqi official selling prices for cargoes bound for Asia (compared to Oman/Dubai).
Source: SOMO.
Iraq, while mimicking Saudi Aramco’s price changes, stuck to its policy of keeping its crude relatively cheap, promising to cut the price of its flagship crude, Basra Medium, by 70 cents per barrel. For August-loading cargoes, the price is only slightly cheaper than Oman/Dubai and only $0.10 per barrel lower than the average of the two benchmarks. In contrast to Saudi Arabia, Iraq’s exports have not been affected as much by the demand downturn, and seaborne traffic in May was actually at a five-year high, according to Kpler data, but Iraq has since changed its tune and reduced its exports to 3.35 million bpd (down about 200,000 bpd from the previous month). The strength of Dated Brent crude has preferentially benefited Iraq’s formula prices linked to the physical benchmark (Saudi Arabia prices its barrels based on ICE Brent crude), so the price increases implemented by state oil marketing company SOMO for cargoes bound for Europe were much smaller than those of Aramco. Basra Medium was increased by 45 cents per barrel from July, at a discount of $2.40 per barrel to dated crude, while the heavier Basra Heavy grade was increased by 60 cents per barrel, at a discount of $4.95 per barrel.
Figure 6. Iraq’s official selling price in Europe (vs. Dt Brent)
Source: SOMO.
SOMO still sets the official price for Kirkuk crude, which has so far been sourced from Kurdish oil production, but the impasse over the suspension of supplies of the Kirkuk-Ceyhan pipeline remains as difficult to resolve as it was a year ago. However, Kurdish oil production continues to grow month by month, increasing Baghdad’s difficulty in meeting its OPEC+ production targets. SOMO reports that production in Baghdad-controlled areas is 3.83 million b/d, well below the 4 million b/d target, but Kurdistan may be producing an additional 350,000 b/d. At least half of Kurdish oil production is smuggled into neighboring Turkey and Iran, making it nearly impossible for Iraq’s federal authorities to ultimately control the rampant trade.
Figure 7. Iranian official selling prices for cargoes bound for Asia (compared to Oman/Dubai average).
Source: NIOC.
The election of former Iranian health minister Massoud Pezeshkian in the second round of the Iranian presidential election on July 5 was hardly a transformative event for the country’s oil industry. There was no discussion of easing sanctions against Iran, and if Donald Trump is re-elected, they will get even worse. As long as Chinese buyers continue to buy Iranian oil, Iran will remain dependent on the major importer. That doesn’t mean Iran won’t seek some kind of de-escalation, as seen with the recent release of the Chevron-chartered Advantage Suite tanker and an Iraqi Basra cargo bound for Turkey that was seized by the Iranian navy in January. Iran’s pricing policy remains largely armchair, with prices for delivery to China falling well below the formula price published by the national oil company NIOC and as low as -$7 or -$8 per barrel against Brent crude futures. But in doing so, Iran has remained consistent and toed the line of Saudi Aramco. NIOC lowered its August Asian crude prices by 50-70 cents per barrel, with the nominal price of Iran Light falling to a premium of $2.10 per barrel to the Oman/Dubai average.
Article by Gerald Jansen of Oilprice.com
Other popular articles from Oilprice.com:
