By Tsvetana Paraskova
OPEC’s second-largest oil producer, Iraq, has never hidden the fact that it wants to get the highest possible revenues from its oil. It even pleaded exemption from the cartel’s cuts in the talks leading to the production reduction deal, on the grounds that it needed more funds to fight ISIS.
Iraq didn’t get that exemption, but it is now considering a change in the way it prices its oil exports to the most prized market for the Middle Eastern producers—Asia—in an effort to increase its oil revenues.
Iraq’s state marketing company SOMO is seeking feedback from customers by August 31 on a plan to change the Basra crude pricing for Asia to the Dubai Mercantile Exchange (DME) Oman futures beginning next year, dropping the average of Oman and Dubai quotes by S&P Global Platts. Iraq’s idea is seen as a breakaway move from the leading Middle Eastern exporter, Saudi Arabia, whose official selling prices (OSP)—using S&P price assessments for decades—are usually followed by the other main producers in the region.
Iraq’s plan is still being discussed within SOMO, and needs refinement and buyers’ feedback, but it is generally seen as an attempt by Iraq to squeeze every possible dollar out of its crude in this lower-for-longer oil price era.
“The Iraqis are probably looking at the high premiums paid for their oil that’s over and beyond their announced official prices, and recognizing that there’s money left on the table,” Nevyn Nah, a Singapore-based analyst at Energy Aspects, told Bloomberg. “I’d say SOMO is steps ahead of the rest of Middle East in its intention to capture their oil’s value, but the proposal needs some refinement and feedback from buyers,” Nah added.
Other Middle Eastern producers are monitoring this proposed change, but they are unlikely to break away from the tradition—using Platts assessments—until Saudi Arabia makes changes to its pricing, and there are no indications that Aramco is considering a change to its pricing method.
So far, reports suggest that buyers see both positive and negative impacts of Iraq’s proposed pricing change.
Some buyers don’t support the plan because longer lead times between pricing and delivery would make it more difficult to hedge against price changes. The new method—if adopted—would use the monthly average of DME Oman futures two months before the loadings, which means that if a loading is scheduled for October, it would use the August futures contracts. Buyers would know only in the middle of September if they had successfully bid for the cargo, which would leave them little time to hedge against price changes.
According to traders who spoke to Reuters, the lag time in pricing and loading would also make it difficult to compare the prices of crude grades, because other producers price their oil for the loading month.
But some traders see the positive side of the lag time in the pricing change. Traders holding Basra crude cargoes without fixed destinations would know Iraq’s prices two months before the delivery date, so they can have more time to decide where to send the cargoes on the basis of the most profitable regional price spreads.
Traders and sources told Reuters that Iraq’s plan was “very ambitious” and would probably need refinement.
Iraq is trying to reform its oil sector and get more money for its crude. To get higher prices, SOMO started selling spot Basra Light and Heavy cargoes on the DME Auctions platform in April this year. The September 2-million-barrel Basra Heavy cargo was awarded at a premium of US$1.37 per barrel over the September Basra Heavy Official Selling Price (OSP), while a 2-million barrel cargo of October Basra Heavy was awarded at a premium of US$1.63 per barrel over the October Basra Heavy OSP.
But dropping Platts assessments and moving to DME Oman futures to price the crude oil sent to Asia may require more refinement, discussions, and buyers’ input, as it seems to have received a mixed reaction from customers. Still, if Iraq introduces that change, it would be a major breakaway move from the pricing tactics of OPEC’s biggest producer and exporter Saudi Arabia.
By Tsvetana Paraskova for Oilprice.com