As we continue to kick the prospect of global economic recovery down the road of 2021, caution remains the buzzword of the oil markets. The less changes month-to-month, the more important the role of secondary factors – narratives spun for the benefit of oil producers or refiners, veiled strategies to get the market where the money is for the oil market’s greatest. As we shall see, Middle Eastern OSPs increasingly exhibit the willingness of producers to maximize profits in a global market that grows slower than expected. Corroborating this, the OPEC production quota increases have been rather tame, setting both May and June 2021 at 350kbpd and July 2021 at 440kbpd. Throughout this period, Saudi Arabia will restore the 1mbpd it had pledged to cut back in February. This means that by July 2021, i.e. the peak of the summer season where most refiners usually prefer to run maximum capacity, OPEC will only be producing the same amount as they planned for November-December 2020.
Graph 1. Saudi Aramco Official Selling Prices for Asia in 2018-2021 (vs Oman/Dubai Average).
There were both bullish and bearish factors to be accounted for in Aramco’s May 2021 OSPs, the traditional harbinger of pricing strategies to come in the Middle East. On the one hand, the M1-M3 Dubai spread jumped 50 cents per barrel from February and averaged 1.19 USD per barrel in March. In addition to this, refining margins for light distillates looked fairly robust in March, the regional gasoline swap crack moved to its highest in 16 months. On the other hand, spot trading of Saudi crudes after the above-the-market appreciation of light grades in April 2021 has been relatively meagre. The 50 cent per barrel hiking of Arab Heavy and Arab Medium seems rather counterintuitive as market demand for heavier barrels was much weaker than for lighter grades. This might imply that Saudi Aramco now cares more about the grand message/narratives it puts out into the market than about the actual mirroring of the current supply and demand balance, cognizant of the persisting challenges to bounce back to full demand in Asia.
Graph 2. Saudi Aramco Official Selling Prices for NW Europe in 2018-2021 (vs Brent Bwave).
This being said, Saudi Aramco decided on a 20-50 cents per barrel increase with its Asia-bound May 2021 prices. Interestingly, the heavier the grade the bigger was the month-on-month hike, with both Arab Heavy and Arab Medium witnessing 50-cent upward moves, fuelling speculation that spot trading will bring about deep discounts to the OSP. After a blatantly weak February (4.56mbpd), Saudi loadings en route to Asian customers remained tame in March 2021 at 4.58mbpd. Compared to January 2021 (5.36mbpd), Saudi exports to Asia have fallen by more than 10% over the course of past two months and the aggressive Saudi pricing might insinuate that this trend is here to stay further on. In contrast to Asia, Saudi Aramco’s OSPs for its Europe-bound cargoes in May were stagnant, Arab Light was the only grade not to be rolled over month-on-month, seeing a modest 20 cent per barrel decrease to -$2.40 per barrel against ICE Bwave.
Graph 3. Official Selling Prices of ADNOC in 2017-2021 (vs Dubai Average).
Saudi Arabia’s aggressive pricing policy vis-à-vis its key Asian customers such as India or China will only boost the increasing flows coming in from West Africa and the United States. The government in New Delhi even instructed the country’s state refiners to cut reliance on Middle Eastern barrels, creating a double motivation to bring in lighter (and cheaper) supplies. The United Arab Emirates has seen its crude exports to India for 3 consecutive months already, prompting ADNOC to seek buyers farther out – luckily for the Emirati NOC both South Korea and Japan found the lighter Murban and Das much to their liking in March-April 2021. With its May 2021 official selling prices, ADNOC opted for another layer of nuanced, increasing all grades by 35 cents per barrel from April.
Comparing Murban, ADNOC’s flagship grade, with its direct Saudi competitor Arab Extra Light (both 40 API, around 1% Sulphur though the Emirati barrels are less sulphurous) shows that on all recent occasions that Aramco chose to go aggressive with its pricing, ADNOC cuts down some 5-15 cents per barrel from its price increase. The difference in pricing bases notwithstanding (Saudi is priced against the Oman/Dubai average whilst ADNOC relies on the Platts-operated Dubai), ADNOC has effectively been ridding itself of some profits. All the while one might notice ADNOC’s propensity to mellow the Saudi ambition for steeper price hikes, the Emirati OSPs will matter less now that ADNOC has launched ICE Futures Abu Dhabi (IFAD). From now on, Murban OSPs will be based on the grade’s two-month-in-advance futures contract settlement. All the other ADNOC grades will continue to be defined in differentials to Murban.
Graph 4. Kuwaiti Super Light Crude Premium vs Oman/Dubai Average // vs Arab Extra Light in 2018-2021 (USD per barrel).
For the second time in history, the Kuwaiti national oil company KPC has set its flagship KEB and KSLC grades at the same level of +$0.7 per barrel to the Oman/Dubai average. Comparing the May 2021 OSPs to April, KPC has hiked KEB and KSLC by 45 and 30 cents per barrel, respectively, implying that Kuwait’s pricing policy was rather to the aggressive side, i.e. in line with the general line of Saudi Aramco for the forthcoming month. Kuwait carried out some noteworthy success stories in the past month, with 7.2 MMbbls KEB sailing towards Japan in March 2021, the highest since July 2020. Other traditional partners South Korea and India adding 9 MMbbls each to Kuwait’s last month supply tally, effectively accounting for more than half of Kuwait’s total crude exports.
The Iraqi state oil marketing company SOMO took its time with May 2021 OSPs and only published them on April 12, roughly a week after Saudi Aramco. The additional week’s deliberation has once again nudged SOMO to opt for a more moderate, more nuanced pricing policy for May 2021. Although it raised both Basrah Heavy and Basrah Medium going to Asia by the same 50 cents per barrel than Saudi Aramco did its heavier grades, the lightest of the Iraqi slate Basrah Light saw a modest 10 cents per barrel increase to a +$1.4 per barrel premium over the Oman/Dubai average. Basrah Light has already had a great March in terms of crude exports to Asia, hitting a total of 47.5 MMbbls (almost triple of what it was in February), one should expect strong demand for the grade in the upcoming months, too.
Graph 5. The official Selling Prices for Iraqi Crudes to Europe (FOB Basrah/Kirkuk) in 2018-2021.
In an another display of great nuance, SOMO’s pricing policy towards should be noted separately. Whilst Saudi Aramco rolled over most of its April OSPs into May 2021, SOMO has dropped every single grade, even Basrah Heavy, albeit at a symbolic 5 cents per barrel (to a -$5.35 discount to Brent). Once again, Basrah Light is the most-discounted grade, decreasing 50 cents per barrel from April to a -$3 per barrel discount to Dated. It needs to be admitted though that the time it took SOMO to issue its May 2021 OSPs has played into the hands of the Iraqis as Europe’s flagship medium crude Urals went into a freefall, hitting deep discounts that it last witnessed at the peak of the 2020 spring COVID-depression (CFR Urals in the Mediterranean attained -$2.1 per barrel and plummeted to -$2.6 per barrel in the Baltics).
Graph 6. Official Selling Prices for Iranian Crudes to Asia (FOB Kharg Island vs Oman/Dubai Average) in 2018-2021 (USD per barrel).
On the back of the JCPOA negotiations progressing steadily in Vienna, Iran is consolidating its efforts to mark a gradual comeback to the markets. Concurrently to the nuclear talks, Tehran revived links with OPEC – the prospect of Iranian barrels flooding the markets as soon as US sanctions are lifted presents a quite deleterious future for the oil cartel’s leaders. Difficult as it is to track Iranian tankers with their transponders off, one can claim that March 2021 has seen a tangible resuscitation of interest towards Iranian barrels, especially from China. Further rapprochement of the two nations can be already considered a certainty, after Tehran and Beijing signed a 25-year trade and security cooperation agreement (the text of which remains hidden from public eyes), under which China promised investment into Iranian infrastructure in return for “greater access to Iranian oil”.
Graph 7. Iranian Light vs Arab Light Premia in 2018-2021 (against Oman/Dubai Average, USD per barrel).
The Iranian national oil company NIOC has raised its Asia-bound official selling prices for May 2021 by 35-50 cents per barrel. The heavy sour Soroosh (19 API, 3.9% Sulphur content) saw the largest month-on-increase, moving to a -2.85 per barrel discount to the Oman/Dubai average. This means that NIOC continues with its penchant to see Iranian Light 15-20 cents per barrel cheaper than its Saudi peer, Arab Light (before the onset of US sanctions Iranian Light was routinely assessed at a premium). NIOC shied away from the full-on Iraqi opening towards Europe, dropping prices by 15-35 cents per barrel, prepping the erstwhile favourite of Mediterranean refiners, Iranian Light.