Things have taken a bad turn for the Middle East. Asia, by far the largest demand hub for Saudi Arabia, Iraq or the United Arab Emirates, seems to be going through the same stage of weakness that Europe and the United States were in the spring. Not buying enough, depleting crude inventories and generally expecting flat prices to drop lower before they come back. Perhaps there is no better example of this than China, a country that was supposed to lead summer demand recovery yet ended up buying the least crude this year as its maritime imports dropped to 10 million b/d. Such a general trend of weaker demand and sluggish physical activity inevitably impacted the Middle Eastern futures market, with the Dubai cash-to-futures spread shedding 60 cents per barrel compared to May and averaging only $0.95 per barrel. Seeing that refinery margins have been struggling to move any higher - to be fair they did not decline either - the market was preparing for a substantial price cut for August-loading cargoes across the Middle East.
Chart 1. Saudi Aramco's Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
Saudi Aramco did exactly what was expected. Having already cut formula prices for July cargoes, it lowered Asian OSPs across the board. The lighter Arab Extra Light and Arab Light were slashed by 60 cents per barrel, whilst the heavier grades Arab Medium and Arab Heavy saw an even bigger downward correction, by 70 cents per barrel. With this, Asian formula prices were basically back to May pricing levels, with Arab Light trading at a $1.80 per barrel premium to Oman/Dubai and Arab Medium set $1.25 per barrel higher than the benchmark. The lower pricing was in great measure brought about by very low nominations from term buyers. Total volumes departing for China in June averaged only 1.15 million b/d, the lowest monthly nomination since the first full-impact COVID-19 month of March 2020, whilst India hit a three-year low with a mere 530,000 b/d of June loadings. Even though both countries lifted more in July, the sentiment remained weak and Saudi Aramco needed to react.
Related: OPEC: Oil Is Indispensable for Global Electrification
Chart 2. Formula prices of Saudi cargoes bound for Northwest Europe by selected grades (vs ICE Brent).
Source: Saudi Aramco.
Compared to Asia which did not really experience notable weakness in buying up until June this year, Europe was already one phase ahead - it saw an all-round collapse of differentials earlier and was rebounding strongly into the summer. Saudi Aramco lifted its Europe-bound August formula prices by a hefty (and uniform) 90 cents per barrel. By not cutting when regional differentials were collapsing and hiking when conditions were ripe, Aramco managed to bring its European OSPs to the highest level since December 2023. Arab Light is at a $4 per barrel premium to ICE Brent, and even Arab Heavy is trading at a premium to the European futures benchmark. That would seem extraordinary in the spring months, but it has gone down well for the summer. In fact, according to market reports all the European term deal holders nominated full monthly amounts for August, suggesting that even despite high prices demand for medium sour crude remains high.
Chart 3. Kuwait Export Blend official selling prices into Asia, compared with Arab Medium and Iranian Heavy (vs Oman/Dubai average).
Source: KPC.
Kuwait doesn't necessarily share the concerns and qualms of Saudi Arabia, after all the main reason why the country's exports have been going down so heavily in the past years stems from its own refining. Not only is the 615,000 b/d Al Zour refinery firing on all cylinders, the 230,000 b/d Duqm refinery in Oman that the Kuwaiti state oil company co-operates has reached full production capacity, too. Depending equally on South Korea, China, and Vietnam as its key contractual partners, KPC nevertheless followed Saudi Aramco's suit and slashed the Asian formula prices for Kuwait Export crude by 70 cents per barrel, taking it to a $1.25 per barrel premium over the Oman/Dubai average. Even the extra light KSLC grade, relatively minor in terms of volumes as KPC has been loading an average of three tankers per month, was cut by 60 cents per barrel vs the July OSP, fully in line with Arab Extra Light.
In the meantime, Kuwait has registered probably one of the largest oil discoveries of past years, claiming that the offshore al-Nokhatha field contains some 2.1 billion barrels of light oil and 5.1 trillion cubic feet of natural gas. As Kuwait has allocated a $300 billion upstream investment budget for its production capacity increases but genuinely lacked any high-impact greenfield project to work on, the field might be a game-changer for the Middle Eastern country's long-term target of increasing crude production capacity to 4 million b/d.
Chart 4. ADNOC Official Selling Prices for 2017-2024 (set outright, here vs Dubai).
Source: ADNOC.
As has become customary, the national oil company of Abu Dhabi ADNOC is the one to start the price-setting spree in the Middle East and for August (once again), the news weren't particularly upbeat. They weren't bad either as the monthly average of Murban traded on the IFAD exchange amounted to $82.52 per barrel, down $1.41 per barrel compared to July's price. Although Murban is still assessed slightly above Dubai swaps, it is nowhere near as spectacular as it used to be a year or two years ago. The pricing plight of Murban is largely driven by there being significantly more of it in the market as exports of the light sour grades jumped to 1.3-1.4 million b/d since the beginning of this year and have stayed high since. ADNOC's refinery flexibility project that aimed to send heavier grades into the domestic refining system has finally come to a close, albeit at the expense of Murban's past premiums. The UAE's oil champion has also brought Upper Zakum (UZ), the country's answer to Saudi Arabia's Arab Light, to parity with Murban after it traded at slight premia to Murban over several months, but seeing weaker demand for UZ in Dubai trades, ADNOC decided to react.
ADNOC is increasingly diversifying its portfolio into gas. In fact, the largest announcement coming out of the Emirates in July was linked to its planned 9.6 mtpa Ruwais LNG export terminal. Western oil majors TotalEnergies, Shell, BP as well as Japan's Mitsui have all taken 10% equity stakes, with Shell and Mitsui also signing long-term supply agreements. Following ADNOC's natural gas-focused acquisitions in Mozambique this May and the mulled purchase of Australia's upstream firm Santos, gas seems to be at the forefront of the UAE's strategic growth.
Chart 5. Iraqi Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai).
Source: SOMO.
Sticking to its course of mirroring Saudi Aramco's pricing changes but keeping its grades comparatively cheaper, Iraq has also committed to a cut of 70 cents per barrel for its flagship grade Basrah Medium. For August-loading cargoes, the price will be coming in at a slight discount to Oman/Dubai, just $0.10 per barrel lower than the average of the two benchmarks. In contrast to Saudi Arabia, Iraqi exports weren't really impacted by lower demand, if anything seaborne flows in May were the highest in five years according to Kpler data, even though since then Iraq has mended its ways and lowered exports to 3.35 million b/d (down about 200,000 b/d month-over-month). As the strength of Dated Brent has preferentially benefited Iraqi formula prices that are linked to the physical benchmark - Saudi Arabia is pricing its barrels based on ICE Brent - the increases carried out by the state oil marketing company SOMO for Europe-bound cargoes were much smaller than Aramco's. Basrah Medium was hiked by 45 cents per barrel from July to a -$2.40 per barrel discount to Dated, whilst the heavier Basrah Heavy grade saw an uplift of 60 cents per barrel to a -$4.95 per barrel discount.
Chart 6. Iraqi official selling prices in Europe (vs Dated Brent).
Source: SOMO.
Whilst SOMO still sets formula prices for the Kirkuk grade which has historically been sourced from Kurdish-origin production, the deadlock around halted pipeline supplies along the Kirkuk-Ceyhan pipeline remains just as difficult to resolve as it was a year ago. Nevertheless, Kurdish production keeps on increasing with every month, aggravating Baghdad's woes in meeting its OPEC+ production target. Even though SOMO reports production of 3.83 million b/d in the regions controlled by Baghdad, substantially below the 4 million b/d target, there might be an additional 350,000 b/d produced in Kurdistan. At least half of the Kurdish output is smuggled into the neighboring countries of Turkey and Iran, ultimately making it close to impossible for federal authorities in Iraq to control the rampant trade.
Chart 7. Iranian Official Selling Prices for Asia-bound cargoes (vs Oman/Dubai average).
Source: NIOC.
The election of former health minister Masoud Pezeshkian in the second round of Iran's presidential elections held on 5 July was hardly a transformative event for the country's oil industry. There is no discussion of easing sanctions on Tehran - if anything, Donald Trump's potential re-election would worsen that squeeze - and for as long as Chinese buyers are still buying Iranian crude, Iran will just stick to relying on its key importer. That is not to say Tehran would not seek some form of de-escalation, and the recent release of the Chevron-chartered Advantage Sweet tanker as well as the Iraqi Basrah cargo that was sailing towards Turkey when it was seized by Iran's navy in January. Iran's pricing policy remains a largely academic exercise as delivered prices to China are significantly below the formula prices that the country's state oil firm NIOC publishes, dropping as low as -$7 or -$8 per barrel to Brent futures. Yet in doing so, Iran has remained consistent and followed the line toed by Saudi Aramco. NIOC cut its Asian August formula prices by 50-70 cents per barrel, lowering the nominal value of Iran Light to a $2.10 per barrel premium against the Oman/Dubai average.
By Gerald Jansen for Oilprice.com
More Top Reads From Oilprice.com:
Gerald is an independent freelance energy analyst based in Rotterdam, the Netherlands. More
Comments
Would anyone believe that such a reduction would cause oil prices to be under such pressure for the last six months? I very much doubt it.
Therefore, there must be other factors at play. The first that comes to mind is market manipulation by the United States in cahoots with the IEA, speculators and oil traders aimed to depress oil prices in a presidential elections' year.
However. I am convinced that oil prices will very soon resume their surge with Brent crude reaching $90 a barrel in the second half of the year.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert