Market tightness is the new byword on the global crude markets, though this given bout of supply scarcity (luckily) bears all the traits of a forethought and premeditated one. Saudi Aramco has sent a strong signal to the market with its February 2021 official selling prices, surpassing market expectations. All Asia-bound grades were hiked by 20-70 cents per barrel, with steeper increases in the light range (Arab Light saw the biggest month-on-month move). Combined with turnaround in Japan and China assumed to take place in February and Saudi Arabia’s unilateral commitment of cutting production by 1mbpd in February-March 2021, the assertiveness of Saudi Aramco might lead some refiners to rethink their regional purchases. In addition to the above, contango seems to have disappeared from the markets so storing crude in hefty storage tank farms no longer makes commercial sense. Saudi Aramco reacting to Dubai backwardation extending to its widest since July 2020 was to be expected – boosted by robust demand from China and India throughout December, the Dubai M1-M3 surged as high as 92 cents per barrel on December 16, though it has declined since. However, as the market moved closer towards the end of December 2020 the extent of the backwardation eased to 20-30 cents per barrel, meaning that all the while Middle Eastern NOCs were expected to hike their February OSPs, the ambition of the increases conveyed a message that was primarily political in its nature, namely that Saudi Arabia is intent on maintaining the current price level even if it requires cutting output.
Graph 1. Saudi Aramco Official Selling Prices for Asia in 2018-2021 (vs Oman/Dubai Average).
Source: Saudi Aramco.
As assertive as Saudi Aramco’s pricing might be perceived vis-à-vis the Asian crude market, its European prices were dropped for the second consecutive month. What is more, instead of the previous months’ tailor-made changes, the NW Europe-bound OSPs slid 50 cents per barrel across the board for all grades. The primary reason for the Saudi NOC being this clement towards European customers lies in the recent depreciation of Urals differentials, its main competitor in the region. Both Med Urals and Baltic Urals have headed into December 2020 with premia against Dated Brent yet both ended the month with steep discounts vs the global benchmark (Med Urals dropped to -1 per barrel, Baltic Urals dived even deeper to -1.5 per barrel).
Graph 2. Saudi Aramco Official Selling Prices for Northwest Europe in 2018-2021 (vs ICE Bwave).
Source: Saudi Aramco.
Very interestingly, ever since the April 2020 nosedive of Middle Eastern differentials virtually all grades across the spectrum move in complete unison. Whilst in January 2020 (i.e. in times when Venezuelan and Iranian volumes were already out of the market) the margin between Arab Heavy and Arab Extra Light almost reached $6 per barrel, fast-forward to January 2021 and the same grades wield exactly the same differential. All the while a part of this is the OPEC+ factor in action as the total OPEC production tally has dropped 3mbpd to 25.5mbpd, Saudi Aramco has also made sure that its prices do not decouple – some narrowing notwithstanding all the other Middle Eastern producers have kept their grade differentials intact. For instance, the Basrah Light-Basrah Heavy (where the API difference is much less than the 12° API between Arab Heavy and Extra Light) margin stands at +2.50 per barrel in February 2021.
Graph 3. Kuwait Export Blend vs Arab Medium and Iranian Heavy in 2018-202 (against Oman/Dubai average).
Somewhat surprisingly, Kuwait became one of most discussed Middle Eastern oil-producing nations following the en-masse resignation of its government led by Sheikh Sabah al-Khalid al-Sabah. Ever since more than 30 Kuwaiti MPs have started a motion to question the Prime Minister whether his cabinet choices reflected the poll results and whether the process of picking the Parliament’s Speaker and top officials was not subjected to his interference trouble was brewing yet few could have expected it now, i.e. still a week before the Prime Minister’s questioning was to take place. Whilst the new emir will certainly be tested by this confrontation with Kuwait’s Parliament, February 2021 official selling prices as issued by KPC were totally immune to the political turmoil.
Graph 4. Kuwait Superlight Crude Differentials to Oman/Dubai and Arab Extra Light in 2018-2021 (USD per barrel).
Kuwait’s flagship crude KEB (Kuwait Export Blend, density of 31° API and Sulphur content of 2.5%) was hiked 40 cents per barrel month-on-month for Asian customers, fully in line with Saudi Aramco’s Arab Medium. Interestingly, Europe has been fairly out of scope for Kuwait for quite some time already as the last cargo bound for the Old Continent loaded in March 2020. The second-largest crude stream of KPC, the Kuwait Superlight Crude (abbreviated KSLC), concurrently moved in unison with Aramco’s Arab Extra Light, marking the fourth consecutive month when the two go hand-in-hand. This was not the case when KPC started marketing KSLC in October 2018, in those days KSLC wielded a solid 0.50 per barrel premium over AXL which, however, was eroded gradually in 2019.
Graph 5. Iraqi official selling prices for Asia in 2018-2021 (vs Oman/Dubai average).
Whilst the Iraqi government has been kept busy with ramming through the 2021 federal budget, cutting a deal with the Kurdish government and preparing for a prospective devaluation of the Iraqi dinar, its usual mirroring of Saudi Aramco’s price indication has kept going. Asia-bound February 2021 official selling prices were hiked by 20-70 cents per barrel, US-bound OSPs rolled over from January or increased by 5-10 cents per barrel, all the while European prices saw a hefty rise by $0.8-1.2 per barrel. Interestingly, the first loadings of Basrah Medium indicate strong interest towards the grade (a mildly more sulphurous version of pre-2020 Basrah Light) in India, with one cargo currently moving towards Greece and United States. When it comes to January loadings of the lightest element of Iraq’s crude portfolio, Basrah Light, heretofore India and China stand out as leading market outlets.
Graph 6. Iraqi Official Selling Prices for the United States in 2018-2021 (vs ASCI).
If one were to ask analysts in early January what would be the extent of February OSPs in the Middle East, the average trend would tilt towards a 20-30 cents per barrel increase. ADNOC, the national oil company of the United Arab Emirates, did just that, refraining from the aggressive pricing policy of Saudi Aramco. Murban, Das, Umm Lulu were all hiked by 25 cents from January, i.e. merely half of what the Saudis raised Arab Extra Light (all of them are comparable in terms of quality, with their density around 39-40° API and Sulphur content hovering around 1%). Upper Zakum saw the largest month-on-month change with a 30 cents per barrel move upwards, marking the historic first-ever occasion when 34° API and 2% Sulphur grade was assessed higher than Murban, the flagship Emirati crude.
Graph 7. ADNOC official selling prices in 2017-2021 (vs Dubai/Oman average).
As any assessment of Middle Eastern pricing strategies and actual export volumes is intrinsically linked to the robustness of Asian demand, it may be worthwhile revisiting the general state of things in Asia. India has been one of the instrumental factors in the robust December crude demand, having ramped up its imports from 3.6mbpd in September 2020 to 4.75mbpd in December 2020. In fact, its appetite for crude was so intense that it managed to fully digest available Saudi flows engendered from China importing less than initially assumed (only 9.8mbpd). Looking into January-February 2021, the limits of Asian crude demand remain unclear as leading nations struggle to roll-out comprehensive vaccination programs and China gradually relaunches its annual import quota allocation mechanisms.
By Viktor Katona for Oilprice.com
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Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.
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