Battle for oil market share intensifies within OPEC

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The ongoing energy crisis has put an end to what appeared to be the ideal bull run for this year’s fall season – OPEC + maintained rigorous discipline even after entering into a new supply reduction deal until the end of 2022, when demand for energy was growing much more steadily than anyone expected. Power consumption mandates, production cuts and power shortages, however, became the new reality of October 2021, reshaping the fundamentals of the global crude market. Chinese buying, still expected to restart at some point later this year, is now off the agenda, while India’s rally after the third wave has been interrupted by an unprecedented wave of shortages of electricity. In the face of all this, producers in the Middle East had to calibrate their November 2021 PSOs very carefully.

Chart 1. Saudi Aramco official selling prices in November 2021 for Asia (USD per barrel, vs ICE Bwave).

Source: Saudi Aramco.

Saudi Aramco cut prices for cargo to Asia in November 2021 by 10 to 50 cents per barrel, with the heaviest heavy Arab flow registering the largest month-to-month change, falling to – $ 0.1 per barrel of discount versus Oman / Dubai. Aramco’s nuanced approach of cutting light output the least makes sense for several reasons: Cracks in the Asian petrochemical industry are still tough enough for grades with a high naphtha cut. Secondly, it will be mainly the Heavy Arabs and Middle Arabs who will come back on the back of Saudi Arabia respecting its gradually increasing OPEC + production targets, i.e. a more abundant supply should generally require pressure on prices falling that Aramco is already anticipating. Third, some Asian customers might be tempted to try the gas-to-oil transition amid sky-high LNG prices, so low prices could potentially point them in Aramco’s direction.

Chart 2. Saudi Aramco official selling prices in November 2021 for Northwest Europe (USD per barrel, vs ICE Bwave).

Source: Saudi Aramco.

Likewise, formula prices for cargoes destined for Europe have been reduced from $ 0.5 to $ 1 per barrel for Northwestern Europe and from $ 0.3 to $ 0.6 per barrel for the Mediterranean, which means Saudi Aramco is poised to compete for a greater market share after the price reversal with OSP in October 2021. OSP’s first cut for cargoes bound for Europe has already taken take place in September, the second month of increase in OPEC + supply, and despite a marginal increase in flows (to 680 kbpd in September) the desired effect is still not there, Saudi Arabia is still missing of some 100-150kbpd of exports to Europe compared to the pre-pandemic era.

Figure 3. ADNOC official selling prices in 2017-2021 (USD per barrel).

Source: ADNOC.

The Singapore marker prices for IFAD’s exchanges (ICE Futures Abu Dhabi) in the first month set the November 2021 OSP for the UAE’s benchmark, the light sweet Murban, at $ 73.41 on barrel. While the firm price is set by the stock exchange, ADNOC decides on the differentials of other qualities compared to Murban and this month, it decided to keep them unchanged, for lack of a strong market index to do otherwise. Murban has still not reached its pre-pandemic export levels of over 1 mbpd, averaging around 930 kbpd in September, as ADNOC’s voluntary production cuts see the final months of their setting. implemented before they are finally reduced in November, implying that from December 2021, UAE production should not be limited by a voluntary production limit.

While overall contract volumes traded did not impress in September, Murban nonetheless achieved a remarkable feat – a cash cargo was offered to IFAD at a differential to the monthly exchange traded average and not to the monthly exchange traded average. the most frequently used Dubai crude valuation. , showing the first real signs of how Murban could undermine the entire Dubai complex (when hedging Murban cargoes the buyer would buy the Brent-Dubai EFS spread which would see him sell Dubai futures ). Meanwhile, despite the globally favorable prices, ADNOC reduced its downstream ambition by abandoning its plan to build a new 400 kb / d refinery in Ruwais which was to be operational by 2026 and offering Abu Dhabi even greater exposure to the petrochemical segment.

Figure 4. Iraqi official selling prices for Europe in 2018-2021 (USD per barrel).

Source: SOMO.

Apparently keen to continue the price battle with Saudi Arabia, the Iraqi national oil marketing company SOMO reflected the monthly changes in the Saudi NOC and reduced the November PSOs of its three grades of Basrah to 40 Asian customers. at 50 cents a barrel, with Basrah Heavy seeing the biggest cut from October. This should help maintain a firm interest in Iraqi barrels – after all, the Basrah Light-Arab Medium spread to its lowest level in 5 years last month (with a rebate of $ -0.60 per barrel) and will remain at the same level in November as well. In the meantime, SOMO may no longer offer Basrah Light cargoes for annual allowances, as its recently leaked message to buyers seems to suggest. Overall, the omission of Iraq’s lightest export stream shouldn’t come as much of a surprise – on the contrary, with production increasingly geared towards heavier barrels, SOMO has never really been able to. to provide the market with genuine Basrah Light quality.

Figure 5. Basra Light-Arab Medium Spread in 2018-2021 (USD per barrel).

Source: SOMO.

September being the second-most important month in terms of exports to Asia this year, Iraq has less to worry about declining firm demand from Asia than it should instead focus on revitalizing the economy. European request. Despite generous OSP cuts – for example, the largest Iraqi flow Basrah Medium would be traded at the same discount of -5.90 per barrel compared to Dated BFO – export volumes are slow to pick up and have accused a fairly tangible delay compared to pre-pandemic levels. It should be noted that this is not just a function of supply and demand, SOMO’s crackdown on re-trading and its demonstrated strict approach to destination clauses. contributed at least as much as market fundamentals did (i.e. barrels of Basrah clearly more difficult to trade freely for those without a futures supply contract with SOMO) .

Figure 6. Iranian official selling prices for Asia in 2018-2021 (USD per barrel).

Source: NIOC.

Since the election of Ebrahim Raisi as Iran’s new president, the question of Tehran’s return to world crude markets has soon lost its vigor. While Iran reportedly intends to make an additional demand beyond the commitments already negotiated, the complexity of finding an outcome that would be mutually acceptable is almost too hard to imagine. For example, the JCPOA negotiating team has still not overcome one of its fundamental flaws, namely that Iran is negotiating with the EU, Russia and China, i.e. countries that have always been in favor of maintaining the nuclear deal, while there have been no direct talks with the United States throughout the process, making it almost impossible to establish a harmonious note.

Regarding Iranian PSOs for cargoes loaded in November, Iran’s national oil company NIOC has followed in Saudi Arabia’s footsteps and lowered its Asian formula prices from 35 cents to 40 cents per barrel, although the Iranian Light gained slightly from its more sulphurous Saudi counterpart Arab Light, now trading at a premium of 1.10 per barrel compared to the Oman / Dubai average. The fact that Iran prefers to keep its Asian prices at the level of prevailing trends may in fact reflect a neglected sense of confidence as the NIOC continues to export barrels of crude to countries in East Asia. About two-thirds of all exports end up in China, although vessel tracking data suggests Iran’s largest outlet is Malaysia, averaging around 0.5 mbpd in July-August (and could be the same for September once all the cargoes are out of hiding).

By Gerald Jansen for Oil Octobers

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