Iraq reinstates freight subsidies to woo European, US buyers: sources

Iraq's State Oil Marketing Organization has reintroduced a freight subsidy for its western customers as it seeks to lure back buyers in an oil market stricken by fragile demand due to the coronavirus pandemic, trading sources said Thursday.

SOMO said it will provide a freight protection calculation of a maximum of 10% of its May Official Selling Prices for buyers in the US and Europe, in a notice seen by S&P Global Platts.

The notice said this decision was taken "in order to preserve fair value while maintaining the continuing competitive of Iraqi crude oil and in order to motivate our customers to raise their contractual quantities destined to Europe and the Americas."

A representative at SOMO told Platts that it is "still in discussions with its customers" on the freight compensation policy without specifying any details.

FREIGHT PROTECTION

SOMO normally provides its term contract holders in the West with an adjustment to the freight rates to encourage them to buy crude despite it being a long voyage.

The bulk of SOMO's crude is exported from the southern terminal of Basra.

Last month, Iraq's state oil marketer completely removed the freight compensation for Western buyers of its oil as freight had risen dramatically after Saudi Arabia had embarked on an oil price war.

Saudi Aramco also made a similar move in April though it reduced to its freight compensation to 10% in April and did not completely remove it like SOMO.

The sharp cuts in official selling prices of Middle Eastern crudes had resulted in a massive surge in tanker costs.

DEMAND CRUNCH

The freight policy change in April backfired to some extent as Iraq's market share in Europe fell in April, sources said.

This decision, which was branded by many Europe-based traders as unpopular, resulted in fewer Iraqi barrels coming to the region.

Between 700,000 and 800,000 b/d of Iraq's Basrah Light and Basrah Heavy crude grades travel to Europe, with Basrah Light making up around two-thirds of the total amount.

European refiners are facing a tough time with low margins and weak demand for key oil products like jet fuel and gasoline which are squeezing their profits in the wake of COVID-19.

Refineries in Europe are often complex and rely on a diet of heavy and medium sour crudes such as Russia's Urals, Iraq's Basrah Light, the UK's Forties and Saudi Arabia's Arabian Light.

This week SOMO raised the OSPs for Basrah Light and Basrah Heavy loading in May for its European and US customers.

It however reduced its OSPs for its Asian customers, which remains Iraq's key market.

For crude destined for Europe in May, SOMO raised Basrah Light and Basrah Heavy by 50 cents/b and 75 cents/b respectively but kept the Kirkuk OSP unchanged.

The Basrah Light May differential for European refiners is now at a discount of $6.55/b to Dated Brent, Basrah Heavy is at a discount of $11.10/b while Kirkuk remains is at a discount of $6.85/b.