Houthi rocket attacks on tankers transiting the Red Sea and the Bab-el-Mandeb strait have actually raised oil costs, enabling OPEC+ heavyweights such as Saudi Arabia or the United Arab Emirates to preserve one’s honor after the most current conference of the oil group really triggered another sell-off instead of convincing the oil markets that Riyadh, Moscow and the others might handle the mistakes of decreasing need. Nevertheless, even with Dubai returning to the $80 per barrel mark, belief has actually been weak throughout the Asian market, intensified by China’s upsetting silence on brand-new import quotas. The Dubai futures agreement moved into contango this month, for the very first time in 3 years, with spot-traded medium sour grades throughout the Middle East continuing their decrease in the middle of increasing schedule and subsiding need.
Chart 1. Saudi Aramco’s Authorities Asking price for Asian Freights (vs Oman/Dubai average). Source: Saudi Aramco.
The flattening backwardation curve in the Dubai futures agreement, with November dropping a large $1.11 per barrel compared to the October average, has actually set the Asian phase for a substantial formula cost cut from the similarity Saudi Aramco. Regardless of some minimal enhancements in Asian refinery margins, originating from a minor uptick in fuel and HSFO fractures, Asia’s refinery majors commonly anticipated Saudi Arabia to cut its OSPs into January 2024. The Saudi nationwide oil business Saudi Aramco did so, albeit rather unwillingly, decreasing Asia-bound costs by $0.30-0.60 per barrel, with Arab Medium seeing the biggest m/m drop and Arab Heavy the most affordable. This is much less than what the marketplace anticipated, consequently shown in Chinese refiners choosing less into the upcoming month than they typically do. We will see if weaker Chinese need is a reflection of seasonal upkeep or usually weaker margins when refining reasonably costly Saudi barrels, nevertheless, unrefined differentials of other medium sours in Asia have actually been falling a lot more steeply than Aramco’s formula rates. Related: Petrobras Returns to Africa with Shell Possession Acquisition
Chart 2. Formula costs of Saudi freights bound for the United States by picked grades (vs ASCI). Source: Saudi Aramco.
Asia stays the crucial export market for Saudi Aramco, specifically on the heels of Red Sea shipping interruptions possibly deteriorating the practicality of exports into Europe. For European consumers, Saudi Aramco dropped its January OSPs by a massive $2.00 per barrel throughout the board, bringing the heavy sour Arab Heavy to a discount rate to ICE Brent for the very first time given that June 2023. The Saudi criteria grade Arab Light is now priced at a $2.40 and $2.90 per barrel premium to ICE Bwave into the Mediterranean and Northwest Europe, respectively, so for the very first time in numerous months it really feels as if it’s competitively priced. Saudi Aramco has actually likewise altered policy on US-bound freights, cutting all grades by a consistent $0.30 per barrel, marking the very first time that the similarity Arab Medium or Arab Heavy were cut given that October 2021. In the 26 months that followed Aramco constantly treked or rolled over, whatever the scenario. A more positive rates technique from Saudi Arabia may show enhancing export economics into the United States as Motiva began taking in more Saudi barrels just recently.
Chart 3. Kuwait Export Crude main market price into Asia, compared to Arab Medium and Iran Heavy (vs Oman/Dubai average). Source: KPC.
The emirate of Kuwait moved into a brand-new stage after Sheikh Nawaf al-Sabah died on 16 December, changed by the 83-year-old Crown Prince Mishal and activating another complete federal government resignation. Versus the background of this, Kuwait’s nationwide oil business KPC cut the formula cost of its flagship Kuwait Export Blend crude by $0.75 per barrel, more than Saudi Aramco finished with Arab Medium’s 60-cent-per-barrel drop, bringing the OSP to a $2.10 per barrel premium versus the Oman/Dubai average. This marks the largest spread in between Kuwait Export grade and Arab Medium, ticking in at -$ 0.65 per barrel this January, in 7 years, showing a slowly diverging course in between KPC and Saudi Aramco in regards to their rates techniques.
On the other hand, the struggling 615,000 b/d Al Zour refinery that has actually experienced a string of interruptions and dysfunctions throughout this year has actually now formally reached conclusion, with the 3rd and last system of the refinery running complete steam and relatively absolutely nothing standing in Kuwait’s method to completely exploit its broadening downstream capability. The 454,000 b/d Mina Abdullah refinery ignited in December, nevertheless, so the Asian market needs to anticipate more item exports from Kuwait just in 2024.
Chart 4. ADNOC Authorities Market Price for 2017-2024 (set outright, here vs Dubai). Source: ADNOC.
For the United Arab Emirates, the upcoming refinery upkeep program at the 817,000 b/d Ruwais refinery will mark a clean slate. The nation’s probably primary export grade Murban, the only ADNOC-marketed unrefined grade that has its own exchange-traded futures agreement, will be slowly moved far from domestic refining and exported externally, whilst Ruwais would run more on medium sour grades such as Upper Zakum. Abu Dhabi’s state-owned oil business ADNOC has actually currently customized its export strategies; from now on Murban exports ought to be being available in above the 1.6 million b/d mark, nevertheless maybe sadly to the UAE, the marketplaces have actually seen these modifications also.
Murban has actually been trading at a premium to Dubai for a very long time, nevertheless the November spread in between the 2 futures agreements was just partially above absolutely no, the narrowest spread given that the IFAD agreement was introduced. Setting the January cost of Murban at $83.32 per barrel, below $91.00 per barrel in December, ADNOC has actually at the same time raised the medium sour Upper Zakum by a whole dollar, so that in the very first month of 2024 Upper Zakum will be cost a $0.50 per barrel premium to Murban, for the very first time given that February 2021.
Chart 5. Iraqi Authorities Market Price for Asia-bound freights (vs Oman/Dubai). Source: SOMO.
9 long months have actually passed given that the Ceyhan-Kirkuk pipeline was stopped and unrefined production from Iraq’s semi-autonomous Kurdistan area was cut off from export markets, nevertheless, even as we move into 2024 there is still just unclear hope things will turn for the much better anytime quickly. The Iraqi Prime Minister Mohammed Shia al-Sudani has actually revealed some determination to accommodate the issues of upstream companies running in Kurdistan, stating that Baghdad would require to fine-tune its federal spending plan law as fields in Iraq appropriate have a breakeven expense of $8 per barrel whilst ones in Kurdistan are nearly triple that level, nevertheless there is still no warranty this would really take place. Additionally, the Kurdish authorities declare that the well-cost of producing is greater than that, around $30-35 per barrel, so Erbil and Baghdad most likely still require to settle distinctions before a detailed offer can be reached.
Chart 6. Iraqi main market price in Europe (vs Dated Brent). Source: SOMO.
When it concerns rates, Iraq’s state oil marketing business SOMO cut the Asian formula cost of its medium sour grade Basrah Medium by $0.80 per barrel compared to December, decreasing the total premium versus the Oman/Dubai average to $1.00 per barrel. This is more than any Saudi grade for the exact same months, expanding the space in between Iraqi and Saudi rates once again, simply as things have actually begun to feel weaker on the physical side. Likewise, at that level Basrah Medium is a massive $0.70 per barrel more affordable than Arab Heavy and $1.75 per barrel more affordable than Arab Medium, which ought to incentivize Indian refiners to optimize their Iraqi purchases into Q1. Likewise to all Middle Eastern exporters, SOMO’s European rates has actually experienced another substantial cut with Basrah Medium and Basrah Heavy down by $2.20 and $2.40 per barrel, respectively. Provided the approximately $3 per barrel freight expense of sending out a tanker from Basrah to the Mediterranean, the -$ 4.35 per barrel discount rate of Basrah Medium vs Dated Brent looks like a huge arbitrage chance opening for European refiners, simply as Johan Sverdrup’s been completely offered out and enhanced to Brent parity in current weeks.
Chart 7. Iranian Authorities Market Price for Asia-bound freights (vs Oman/Dubai average). Source: NIOC.
Infamously late to release its main market price, Iran’s nationwide oil business NIOC exaggerated itself this time around and just provided the January 2024 OSPs after Christmas. The formula costs are mainly unimportant as Chinese consumers usually purchase their freights more affordable (presently it is rumoured that Iranian differentials have actually enhanced to -$ 6/-$ 7 per barrel to Dubai), nevertheless NIOC wanted to externalize a picture of strength by just cutting $0.40 per barrel from its Asian costs, putting Iran Light at a $3.60 per barrel premium over Oman/Dubai. Despite the fact that the spectre of more sanctions is haunting the longer-term export outlook of Iran, the nation’s exports to China have actually seen a significant rebound in November (Kpler appears to recommend exports increased to 1.5 million b/d, the 2nd greatest speed of exports in the post-sanctions duration).
Unrefined exports might get back at greater as Tehran is obviously nearing in on an oil supply offer to Syria’s 110,000 b/d Homs refinery that Iran’s state-owned refining business NIORDC is looking for to reconstruct. As Iran currently provides oil to the seaside 130,000 b/d Baniyas refinery, a full-blown ramp-up in Syrian refining might raise Iranian exports to the Levant nation to some 200,000 b/d, producing a brand-new export outlet to reduce Tehran’s reliance on China.
By Gerald Jansen for Oilprice.com