The Middle East has steadily reaped the benefits of its oil wealth throughout 2022, arguably one of the most successful years for the region as a whole in recent history. Yet the outlook for next year is not so rosy. The global economy is in disarray, with the double whammy of a strong US dollar and high inflation beginning to impact demand for oil, and perhaps more importantly, China is not is still not out of the woods. Most Middle Eastern exporters recorded their highest spreads ever in 2022, but the downward trend started with November formula prices and continued with December OSPs may last longer provided that. Dubai’s M1-M3 spread fell $0.75 a barrel month-on-month in October, paving the way for price declines. This month is set to see a further drop in the Dubai cash-to-futures spread to around $1.5-$2.0 a barrel. Considering that now the first three months of 2023 are all in contango for Dubai futures, it would be fair to say that deeper formula price cuts are inevitable for the Middle Eastern oil powers.
Figure 1. Saudi Aramco’s official selling prices for Asian cargoes (compared to Oman/Dubai average).
Source: Saudi Aramco. In line with the weakening structure of Dubai and refining margins, Saudi Aramco has reduced formula prices for cargoes loaded in December bound for Asia. Although neither gasoline nor naphtha has shown any semblance of strength recently, Saudi Aramco raised Arab Extra Light’s December OSP by $0.10 a barrel m-on-m to a premium of $6.35 per barrel in Oman/Dubai. Since no one had really anticipated such a move, it could signal less availability of lighter Saudi barrels, potentially hinting at the flows Aramco would cut first. Along with all other qualities, Saudi prices reflected changes in the Dubai curve. Arab Light, the world’s largest crude flow, was cut by $0.40 a barrel, while Arab Medium saw a more drastic reduction of $0.80 a barrel from November. Related: UAE to cut Asia’s oil supply by 5% in December
Figure 2. Saudi Aramco’s official selling prices for shipments to Europe (vs ICE Brent).
Source: Saudi Aramco.
Understanding that December formula pricing should already reflect a new European reality, with no Russian crude available, Saudi Aramco knew it was time for a much-needed hike. After two consecutive month-over-month declines, this time all grades were raised from 0.20 to 0.80 a barrel, with the notable exception of Arab Medium which was simply rolled back to from November. One would think that with the start of December 05 so soon, there would be strong demand from European refiners for Saudi barrels. However, we still see no sign of this, as several northwest European refineries have designated no Saudi shipments for December, relying on a more regional list. Meanwhile, the silent war on US deliveries continues as December formula prices have seen another reversal, keeping all grades at the record highs reached earlier. As for Saudi Arabia’s compliance with OPEC+ production cuts, all available data seems to suggest that Riyadh is doing most of the heavy lifting. Not only did its production fall to 10.8m bpd in October 2022, but its crude exports also fell dramatically, from some 7.5m bpd in August-September to as low as 6.9 million b/d currently.
Figure 3. Official ADNOC selling prices for October 2022 (stated purely and simply, here compared to the Oman/Dubai average).
As Murban’s official selling price for December is formed by the monthly average of October trading on the IFAD exchange, the light and soft Emirates benchmark came in at $93.53 a barrel. After three consecutive month-on-month declines, Murban’s differential over Dubai has started to strengthen again, reflecting the increasingly saturated medium acid market, while the physical availability of lighter grades may become a problem. For December, that premium stands at $2.45 a barrel, up $1 a barrel from this month’s price, and could see further growth through January 2023 as Murban exports continue their sideways trend since September. Over time, discounts set by ADNOC for Upper Zakum, the medium-sour quality in the Emirates, gradually mirror those of Dubai – the December OSP has been lowered from $1.10 a barrel to a discount of $2.80 $ per barrel at Murban. The other two Emirati ranks, Umm Lulu and Das, were renewed from November for the second consecutive time.
Figure 4. Official Iraqi selling prices for shipments to Asia (vs Oman/Dubai).
Iraq’s pricing policy changed very little from Saudi Arabia, lowering the price of Basrah Medium and Heavy to Asia by $0.80 and $1.15 per barrel, respectively, per compared to November 2022 OSPs. That done, Iraq’s medium-sour flagship Basrah Medium still looks solid against its regional peers – even compared to Saudi Arabia’s heaviest marketed-grade Arab Heavy, Basrah Medium costs $0.35 a barrel cheaper next month. SOMO has understood this and has reduced the prices of its December formulas to the same extent that Saudi Arabia has lowered Arab Medium, a generally lighter and sweeter quality than Basrah Medium, which often boasts of a different quality. of its nominal quality specifications. Meanwhile, Iraqi oil exports have been on a downward trend, so less Middle Eastern oil in the market could also be a driver in SOMO’s decision-making. At the same time, in the specific case of Iraq, the decline in exports could be linked to the commercial start-up of its new Karbala refinery, a feat it shares with its southern neighbor, Kuwait.
Figure 5. Official Iraqi selling prices for shipments to Asia (vs dated Brent).
SOMO typically releases formula prices a week after Saudi Aramco and the extra wait time led the Iraqis to raise their December OSPs in Europe by $0.7-1.05 a barrel month-on-month . Perhaps unwittingly, SOMO has found itself in a position where its prices for Europe have a huge competitive advantage over those of Saudi Aramco. Thing is, Aramco’s formula pricing is based on ICE Brent, while the Iraqi state oil distributor has traditionally relied on Dated Brent – and the two recently switched places with Brent CFDs immediately firmly in contango territory. Given that recession fears have weighed on market sentiment for some time, the first steps towards a contango market are not surprising in themselves. That being said, the pervasive gloom and doom still feels massively driven by China’s promised and subsequently canceled opening.
Figure 6. Official Iranian selling prices for shipments to Asia (compared to Oman/Dubai average).
Iran’s state oil company NIOC kept its price changes in line with trends set by Saudi Aramco, cutting prices for Asia and raising them for Europe. The latter is still an academic exercise as the overwhelming majority of Iranian exports are still shipped to China. In Asia-bound formula pricing, Iran Light was discounted slightly less than Arab Light (down $0.30 per barrel at a premium of $5.35 per barrel to Oman/Dubai), but once again we must point out that official Iranian prices do not reflect actual prices there, which are heavily discounted. While the Iranian nuclear talks were expected to resume after the US midterm elections, in the current geopolitical environment it is highly unlikely to happen. Not only have Iranian drone deliveries to Russia rattled the pens of the Biden administration, but the latest IAEA report that found Tehran’s nuclear capabilities at the Fordow site came dangerously close to enriching Military quality has dampened Western willingness to engage in diplomacy for months. , if not years.
Figure 7. Official KEB selling prices for Asian shipments, compared to regional peers (vs. Oman/Dubai average).
Keeping its Kuwait Export Blend crude oil in line with Arab Medium, KPC lowered its December 2022 OSP in Asia by 80 cents to a premium of $3.20 a barrel in Oman/Dubai. Given that historically KEB has always been discounted against Arab Medium (and since May 2022 this discount has evaporated, either at par or pennies above), this trend may continue now that Kuwaiti exports are squeezed by the country’s downstream needs. . By far the best news for Kuwait this month is the launch of exports of products from the Al Zour refinery. Ushering in the capacity of the new refinery (at least that of its first train), it was first a cargo of naphtha sailing to Asia, soon followed by cargoes of VLSFO and jet fuel. After months of struggling to coordinate the start-up of the respective units, years of cost overruns that brought the total cost of Al Zour to $16.2 billion, it could bring some respite to the Kuwaiti oil industry . Crude exports have already reacted accordingly, with November exports falling to 1.65 million bpd, reflecting the capacity of around 200,000 bpd of the refining unit commissioned.
By Gerald Jansen for Oilprice.com
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