Asian crude markets are adjusting to Iraqi risk
LAUNCESTON, Australia: Events seldom unfold in isolation and the recent surge in sectarian violence in Iraq appears to be leading to some shifts in Asian crude oil markets.
Two things stand out as recent developments; firstly the increasing supply from Iran and secondly the reduction in the official selling price of Saudi Arabia’s main crude grade for Asian refiners.
While neither may be directly linked to the startling advances of militants in Iraq, they show that crude markets will subtly do what is necessary to ensure energy needs are met.
Iranian crude exports were 1.21 million barrels per day (bpd) in June, down from 1.33 million bpd in May, according to sources that track tanker movements.
Notwithstanding the small drop in June, Iran is shipping considerably more crude than the 1 million bpd permitted under an agreement between Tehran and the six world powers negotiating a deal to limit Iran’s nuclear program.
China, Iran’s biggest buyer, certainly hasn’t held back in taking cargoes, with May imports rising 36.4 percent from a year earlier to 757,900 bpd.
And it’s not just China. India, Japan and South Korea all have increased oil purchases from Iran.
For the first five months of 2014, imports by Iran’s top four buyers averaged 1.25 million bpd, up 25.3 percent from a year ago.
The numbers show that the 1 million bpd ceiling is being widely ignored, and the lack of action from the Western powers suggest that they aren’t overly concerned.
The possibility, or perhaps even likelihood, of Iraq splitting along sectarian lines is suddenly a larger problem for the West than Iran’s disputed nuclear program.
While the bulk of Iraq’s oil exports are in the south of the country, which is still under the control of the government of Prime Minister Nuri Al-Maliki, there is concern among crude buyers about the potential for disruption.
Iraq is now very much at risk of becoming a failed state. While this scenario is by no means certain, what is certain is that oil refiners prefer stability and security of supply, and will thus turn to Iran over Iraq.
This doesn’t mean they won’t buy Iraqi oil, but it does mean they will seek to lower their reliance on it, and may prefer to buy it through third party traders on a spot basis, thus mitigating risk to themselves.
The decision by Saudi Aramco to lower the premium for August cargoes of its benchmark Arab Light grade is probably not a direct result of Iraqi instability, but more likely a side-effect.
The Saudi producer cut the August official selling price (OSP) of Arab Light to Asian refiners to a premium of $2.05 a barrel over Oman/Dubai, down from $2.25 for July.
The OSP tends to reflect moves in the Brent-Dubai spread, which has narrowed recently, with the exchange for swaps dropping to $4.17 a barrel on Tuesday, down from $4.96 on June 13, which was the highest for nine months.
But it’s worth noting that when the Brent-Dubai spread was around these levels in the fourth quarter of last year, the Saudi OSP was higher, being $3.40 a barrel in October and $3.20 in November.
This suggests the Saudis are keeping their OSP slightly lower in order to ensure sufficient supply for Asian refiners, who buy about two-thirds of Saudi Arabia’s crude exports.
What the increasing Iranian exports and lower Saudi OSPs show is that the crude market is adjusting to the threat posed by the conflict in Iraq in a measured way.
The backwardation has eased slightly, with the front-month contract currently 1.9 percent higher than the six-month, down from 2.6 percent a month ago.
This shows a little bit of a risk premium has been added to future oil deliveries, but not so much as to suggest the market is in any way concerned about the availability of supplies.