The failure of the OPEC+ talks and the subsequent (albeit gradual) rapprochement of the sides coincided with Middle Eastern NOCs setting their August 2021 official selling prices. The connection between the OPEC+ talks and Saudi Arabia’s expectations was visible in that Saudi Aramco did not issue its official prices up until the last point, publishing them only when the Vienna meeting was definitely and certifiably called off. The delay of Saudi Arabia’s month-on-month hikes only underscores the intent; by hiking August prices across all continents, in most cases beyond the general market’s anticipations, Aramco put across a fairly straightforward message that it does not want the collective OPEC+ action to halt and it will not ramp up production beyond its quota. Other national oil companies followed suit, to varying degrees, and now, with the OPEC+ deal alive and kicking again, it all made perfect sense to do so.

Even though overall refining margins seem much healthier in Europe and North America, it was the Asian OSPs that generated the most interest, the main market outlet for Saudi barrels. The inter-month backwardation on Dubai M1-M3 futures widened last month by some 60 cents per barrel, therefore the general expectation was that the increments for August prices would be roughly along those lines. Saudi Aramco, however, raised Arab Super Light by $1 per barrel (to a $3.85 premium vs Oman/Dubai average) and all the other grades by $0.8 per barrel month-on-month. The odd thing about such an across-the-board move was the lack of differentiation between lighter and heavier grades, one of the main trends of 2021 overall after the flattening of differentials on the back of the 2020 price slump.

Graph 1. Saudi Aramco Official Selling Prices for Asia in 2017-2021 (USD per barrel).

Saudi

Source: Saudi Aramco.

Saudi Aramco went for the same move in Europe, too. Formula prices for Northwest Europe were hiked by $0.8 per barrel month-on-month across the board for all grades, whilst US-bound prices were increased by 20 cents per barrel from July, with the exception of Arab Extra Light which was raised by 40 cents per barrel m-o-m. The issue is that the economic normalization that has been happening in western economies impacted lighter ends differently than it did the heavier yields – namely, grades rich in naphtha became the most in-demand segment of the crude spectrum. Bereft of nuance, the August price hike has led to Asian Arab Heavy prices reaching a 9-year high at $1.20 per barrel premium against the Oman/Dubai average, despite a protracted heavy-end weakness across the Asia Pacific.

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Graph 2. ADNOC Official Selling Prices in 2017-2021 (USD per barrel).

Adnoc

Source: IFAD.

The UAE benchmark Murban has followed a different route, even though the overall result was hardly different from its direct peer Arab Extra Light. The IFAD price for August 2021 Murban prices was set at $72.34 per barrel, some $1.28 per barrel above the cash Dubai monthly average. Whilst the exchange naturally calculates the average Murban OSP, the other grades are manually tweaked by ADNOC to reflect current market conditions. Here ADNOC was more in line with the general trend, rolling over Das, hiking Umm Lulu by 5 cents to parity with Murban, all the while dropping Upper Zakum by 10 cents from July to a differential of -$0.6 per barrel to Murban, the lowest since the onset of the pandemic. Upper Zakum, being the heaviest of ADNOC’s major streams at 34° API, is certainly facing a much harder task of finding market outlets than the light sweet Murban.

Graph 3. Iraqi Official Selling Prices for Asia in 2018-2021 (USD per barrel).

Iraqi

Source: SOMO.

Once Saudi Aramco set the overall course for Middle Eastern pricing in August, the Iraqi SOMO had little incentive to diverge from the charted course yet it still tried to add a layer of nuance. The Iraqi state oil marketer hiked Asia-bound prices by 80 cents per barrel month-on-month for Basrah Light and Basrah Medium, whilst increasing Basrah Heavy by 75 cents per barrel to a -$0.65 per barrel discount to the Oman/Dubai average, i.e. softening the blow on the heaviest of streams. SOMO’s European prices were even more buyer-friendly, seeing a 55-65 cents per barrel hike for its flagship grades and rolling over Kirkuk prices from July. Once again, the notion that heavy-yield-rich grades should see a smaller month-on-month increase than those rich in naphtha found its reflection in the August 2021 OSPs.

Graph 4. KPC Official Selling Prices for Asia in 2017-2021 (USD per barrel).

Official

Source: KPC.

Kuwait mirrored Saudi Aramco’s pricing and hiked its KEB August OSP by 80 cents per barrel to a 2.05 per barrel premium over the Oman/Dubai average, keeping the 10 cents per barrel discount to Arab Medium and the 20 cents per barrel discount to Basrah Light. Whilst Kuwait did get a production baseline hike, from 2.81mbpd to 2.96mbpd, its immediate export capacities might be curtailed by peak power demand. Generally reliant on associated gas for its power generation, quota-restricted oil production has triggered a decline in gas available for power generation just as Kuwait has been struggling to cope with one of its warmest summers on record. As a result, crude burns started rising in Kuwait again (getting closer to 0.2mbpd) on the heels of the country hitting several all-time peaks in power demand over the course of this month. Hypothetically, LNG imports might save the day for Kuwait (and it did indeed start importing LNG), however the exorbitantly high prices of liquefied gas limit the Middle Eastern nation’s space in doing so.

Graph 5. NIOC Official Selling Prices for Asia in 2018-2021 (USD per barrel).

Official

Source: NIOC.

According to shipping data, Iranian exports have actually fallen back since May 2021, roughly corresponding to the start of nuclear negotiations. In March-April this year NIOC was exporting some 700-750kbpd of crude, most of it towards the Singapore-Malaysia-China triangle where anything might get blended and relabelled. In May-June, however, this has dropped to a mere 500kbpd, and whilst the possibility of some barrels resurfacing later and avoiding responsibility remains fully valid, the overall trend tilts towards a stagnation rather than an impending Iranian oil export boom. The ascent of Ebrahim Raisi to the post of Iran’s president will complicate matters more as the likelihood of seeing the JCPOA resuscitated following his assumption of office on August 08 is rather slim, i.e. the negotiators have a little more than 2 weeks to find a mutually acceptable solution.

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Graph 6. Middle Eastern Medium Sour Grades in 2018-2021 (USD per barrel).

Middle

Source: Saudi Aramco, NIOC, SOMO.

Interestingly, the Iranian national oil company NIOC copied Saudi Aramco’s 80 cents per barrel month-on-month increase for its flagship Iranian Light and Heavy streams going to Asia in August, sticking to the 30 cents per barrel discount on the Iran Light-Arab Light spread. Whilst reiterating its willingness to remain competitive against Saudi or Iraqi peers, Iran’s current market strategy feels somewhat different than that before 2015 – having become self-sufficient in transportation fuels it has become much more self-centric and lacks the massive hoarding of crude that dominated the pre-2015 reality. According to Kpler data, crude inventories in Iran have been on the decrease since late May so there is not even a stock build-up taking place, in anticipation of big things to come. So in the end, despite all the turbulence that this month has seen, everything returned to its “right” place – OPEC+ is controlling crude supply again, Saudi Arabia is maintaining intra-group discipline and Iran remains an invariable wild card.

By Gerald Jansen for Oilprice.com

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