Spot prices for Mideast Gulf crude have come under pressure this month despite escalating attacks around the strait of Hormuz, as increased export flows and competitive sales by producers in the region kept Asian refiners well supplied.
Signs of a recovery in crude exports through the strait of Hormuz to near pre-war levels appeared to have intensified competition among Mideast Gulf producers. This may have prompted several producers to slash the official selling prices of their November term exports to multi-year lows, despite signs of a stronger market last month. Key producers Saudi Aramco and Abu Dhabi's Adnoc also continued to market large volumes of spot crude into Asia-Pacific. This provided ample supplies for buyers in China, India, Japan and Korea, even as surging freight cost globally eroded economics to pull arbitrage cargoes from the Atlantic basin into Asia-Pacific.
Aramco sold around 40mn bl of crude consisting of Arab Light, Arab Medium and Arab Heavy loading mainly in November to buyers in Asia-Pacific on a spot basis, adding to sales of around 100mn bl last month concluded in a series of deals from mid-September. Meanwhile, Adnoc sold a further 18mn bl of December-loading crude for either delivery or on a ship-to-ship (STS) transfer basis in the Gulf of Oman in its eleventh sale tender.
Adnoc's tender, which closed on 12 October, sold December-loading medium sour Upper Zakum STS cargoes at discounts between $4-5/bl to front-month Dubai assessments, while light sour Das cargoes were sold at a discount of $3/bl up to parity against Dubai. The prices were weaker compared to Adnoc's tenth tender, which closed on 28 September, when it sold December-loading Upper Zakum STS cargoes at parity to Dubai and Das cargoes at premiums between $5-6/bl to Dubai.
The softer market was also reflected in regional benchmarks. The Dubai backwardation, the spread of front-month to third-month Dubai prices and a key gauge of Mideast crude demand, tumbled to a premium of $7.15/bl on 15 October. This was the lowest since 11 August and a sharp decline from the six-month high average of $19.33/bl in September, when supply concerns had underpinned Dubai prices last month after attacks forced Aramco's East-West pipeline off line.
Spoiled for choice
Besides Aramco and Adnoc, other Mideast Gulf producers, including Kuwait, Qatar and Iraq, also continued to sell crude exported from within the Mideast Gulf. Demand for STS cargoes loading in the Gulf of Oman was healthy because sellers were shouldering the bulk of the risk by bringing cargoes out of the strait of Hormuz, market participants said.
Aramco and Adnoc in particular are expected to continue directly offering spot cargoes in the near term despite falling prices and intensifying attacks in the strait because of the importance of crude sales to their economies, the participants added. Meanwhile, both Iraq and Qatar appeared to be mainly relying on trading companies to move their crude.
The increased availability and flexibility of these spot sales, with many recent deals concluded on a delivered basis, have helped Asian refiners cope with surging freight rates that have mostly closed off the eastward arbitrage for usual supplies from the Atlantic basin, including US WTI crude that typically competes with light sour Murban. Buying activity for January-arrival WTI by key northeast Asian buyers had been subdued, with thin interest in particular for shipments transported on very large crude carriers (VLCCs) after rates soared to historic highs last week.
Competitive prices of Mideast Gulf spot crude also enticed strong buying interest from Chinese refiners, as they favoured such prompt volumes over more expensive forward supplies from the Atlantic basin. State-owned refiners snapped up large amounts of Saudi spot crude, which curbed their interest in Russian ESPO Blend. Smaller independent refiners in Shandong also benefited from availability of competitively-priced Basrah crude that plugged a gap caused by tighter availability of their usual Iranian crude feedstock.
