Iraq’s state-owned marketer Somo has split the exports of key Iraqi Basrah crude from two into three grades, now Basrah Light, Basrah Medium (the newest classification) and Basrah Heavy, and also made adjustments in the quality of Basrah Light and Basrah Heavy.
In this episode of The Crude Report, our Asia-Pacific and Middle East crude markets editor Azlin Ahmad talks with Singapore crude reporter Fabian Ng on how these changes are being received in the Asia-Pacific market and the demand for Iraq’s new Basrah Medium crude.
Azlin: Hello and welcome to The Crude Report, a podcast series from Argus on global crude oil markets. This is Azlin Ahmad, crude markets editor at Argus Media. Today my colleague Fabian and I will discuss demand for Iraq’s new export crude, Basrah Medium, and the market reaction to the revised quality for Iraq’s Basrah Light and Basrah Heavy crudes.
So Fabian, Iraq’s move to split Basrah exports into three grades, can you tell us more about when it was decided and why Iraq did this?
Fabian: Iraqi oil marketer Somo first floated the idea of a third Basrah crude back in 2017. But it was in November last year that Somo told customers it was offering a new Basrah Medium crude in 2021, in addition to revised Basrah Light and Basrah Heavy grades. Somo said the move was an "intended segregation" of Basrah Light into two parts.
This was the second time that Iraq has split its Basrah stream. In mid 2015, rising production at heavier oil fields and the country's limited capacity to blend crude to a set gravity and sulphur content prompted Somo to separate the Basrah stream into the Light and Heavy iterations.
Azlin: In addition to exports of the new Basrah Medium grade, you mention that Somo also revised the quality for Basrah Light and Basrah Heavy crudes, what does that mean?
Fabian: Between 2015 and December 2020, Basrah Light and Basrah Heavy were marketed as 34°API and 26°API crudes, respectively, but the grades always fell short of these specifications, and this forced Somo to offer quality compensation to buyers, depending on the actual gravity of the cargoes that the buyers received at loading. The new specifications are more in line with the quality of cargoes that buyers have tended to receive.
Azlin: So what is the revised quality specification for Basrah Light and Basrah Heavy?
Fabian: Somo adopted an on-paper gravity specification of 33˚API for Basrah Light, and 24˚API for Basrah Heavy.
Azlin: And what about the new Basrah Medium crude, what is its API?
Fabian: Basrah Medium has an on-paper gravity of 29˚API.
Azlin: You talk about on-paper gravity, does this means that if the API of the Basrah cargoes that Somo exported fell below the on-paper quality, Somo will have to make some compensation?
Fabian: Yes exactly. We will probably know more about the actual qualities of the three Basrah grades next month after buyers have lifted the first January cargoes, and the compensation scheme that Somo put in place. But back in November, when it announced the new Basrah Medium, Somo had said that when the grades' quality fell short of their new specifications, it will offer a 40¢/bl compensation for each API degree below the Basrah Light and Basrah Medium specifications, and a 60¢/bl compensation reimbursement for each full API degree below the Basrah Heavy description.
Azlin: Now let’s discuss a bit about Asia-Pacific demand for the new Basrah Medium crude and also the revised Basrah Light and Basrah Heavy grades. Has Basrah Medium found ready buyers?
Fabian: Demand has so far been quite good. Asia-Pacific refiners turned more to Iraqi crudes due to the lack of medium and heavy sour crude from Venezuela and Iran because of US sanctions, as well as Opec+ production cuts, which fell hard on heavy sour crude. Some refiners also needed to seek out alternatives after Saudi Arabia cut its February term crude exports after announcing a 1mn b/d voluntary output cut for February and March, in addition to its existing Opec+ cut commitments. The February Saudi term cuts mainly affect Arab Light and Arab Medium grades.
So, earlier this month, Somo sold a Basrah Medium cargo for February loading in a spot tender at a premium above 50cts/bl to the grade’s official formula price, to a Chinese buyer. And January-loading Basrah Medium cargoes were sold to refiners in China and India.
Azlin: And have refiners reacted positively to the revised qualities for Basrah Light and Basrah Heavy for cargoes?
Fabian: Basrah Heavy also traded at firm premiums to its official formula price, probably because of the medium and heavy sour crude supply tightness that I mentioned earlier.
January-loading cargoes of the grade were sold at premiums of around 70cts-$1/bl to its formula price.
Basrah Light was not as strong, possibly because there are more availabilities of lighter crude generally in the market. January-loading Basrah Light cargoes traded at smaller premiums of 20-30cts/bl to its formula price, while some February-loading volumes have also been sold at a small discount of around 5cts/bl to the formula price.
Azlin: That is very interesting. And Argus assesses these Basrah crudes?
Fabian: We launched a price assessment for Basrah Light in back July 2012, and followed that with a Basrah Heavy spot assessment in May 2015. And in December, we added Basrah Medium to our of list of assessments.
Azlin: So we have come to the end of this podcast, it was great to walk through the Basrah crude markets with Fabian Ng, reporter at Argus Media in Singapore. Thank you very much, Fabian
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