Saudi Arabia leads June Opec+ production increase

Saudi Arabia drove a substantial increase in Opec+ production last month in a bid to mitigate potential supply disruptions stemming from the 12-day Israel-Iran war.

Opec+ crude production rose by 830,000 b/d to 35.1mn b/d in June, according to Argus estimates, 290,000 b/d above its collective target for the month (see tables). Saudi Arabia accounted for most of this, boosting output by 600,000 b/d to 9.75mn b/d — 380,000 b/d above its required production of 9.37mn b/d for the month, as published by the Opec secretariat.

Saudi production is normally in line with its Opec+ targets. But fears that the Israel-Iran conflict could cause regional production shutdowns and disrupt exports through the strait of Hormuz saw Saudi Arabia substantially increase output as a contingency measure, sources familiar with the numbers told Argus. Most of the additional output went into domestic storage and some was moved on to ships or storage tanks outside the Mideast Gulf, the sources said, stressing that it did not enter the market. Some output was also rerouted through the East-West Pipeline to the Red Sea, bypassing the strait of Hormuz.

Saudi Arabia's supply to market — or physical sales — in June was 9.35mn b/d, the sources said, adding that the country's Opec+ commitments are based on its supply to market and not production. This would imply that Saudi Arabia was in line with its Opec+ target in June. Argus' monthly estimates are based on wellhead production.

Saudi oil facilities were targeted in a missile attack in 2019 that temporarily shut in 5.5mn b/d of crude output. And Iran has long threatened to shut the strait of Hormuz — through which around 17mn b/d of Mideast Gulf crude and refined products is exported — if attacked.

Regional oil production and oil exports through the strait were not affected during the Israel-Iran conflict during 13-24 June.

China allocations rise

Saudi Arabia's share of the Chinese crude market is increasing thanks to higher output and attractive term formula prices in recent months, with the August-loading allocation to China hitting a two-year high. Refiners in China are set to receive a collective 1.65mn b/d of August-loading Saudi crude, according to market sources. This is 130,000 b/d higher than their July allocations and appears to be the largest amount since September 2023, Argus estimates. The increase was driven by a higher allocation granted to one state-owned refiner, with other Chinese customers' allocations unchanged on the month.

Aramco lifted its August formula prices to Asia-Pacific by 90¢-$1.30/bl from July, higher than expectations of a 50-80¢/bl rise based on the wider backwardation — prompt premiums to forward values — in Mideast Gulf benchmark Dubai crude last month. Most Saudi term grades still represented good value on a delivered China basis next to spot medium sweet crudes from the Atlantic basin despite the price hikes, participants in China said. This together with strong seasonal demand may have prompted refiners to keep their term nominations high.

Buying interest in Saudi crude was strong elsewhere as well. One northeast Asian refiner said it had asked for and will receive slightly above its usual amount. Other refiners based in Asia-Pacific said they requested and will receive their usual volumes of August-loading Saudi term crude.

Requests from European buyers were not significantly higher than usual, traders said. Two European refiners told Argus that they nominated and received their full contractual volumes for August. And demand from other refiners may also have been steady because of firm refining margins and summer demand.