Iraqi Basrah crude differentials under pressure on weak spot market demand

Singapore — Spot differentials for Iraqi Basrah Light crude in Asia have fallen sharply this month, as faltering demand from Chinese buyers and ample inventories weighed on the market.

Iraq's State Oil Marketing Organization was heard to have concluded a tender for August-loading Basrah Light late in the week ended July 18, with the cargo sold to an Asian buyer at a premium of around 6 cents/b to the grade's OSP.

Prior to SOMO's tender, Basrah light cargoes were heard to have exchanged hands between a price range of plus 40 cents to 50 cents to the grade's OSP.

"Overall demand from refiners is still weak, there is a lot of Basrah inventories in the market and Chinese buyers can also just take [cargoes] through the INE [Shanghai International Energy Exchange], there is no need to buy from outside [of China]," a source from an Asian refiner said.

The crude is one of the grades deliverable into the INE's Shanghai crude futures contract. Due to ample supply and tepid buying interest, the Basrah Light market has overall softened in recent days.

"There is now more prompt selling and Chinese traders could also be trying to resell Basrah into the market," a source from a Japanese trading house said.

There were unconfirmed reports of the grade being offered at deep discounts at the moment, sources said.

Earlier in April and May, Basrah crude cargoes fetched firm premiums from robust demand from China, partly because of the grade's deliverability into the INE contract, while most other Middle East sour crudes saw spot rates in deep discounts.

"Asia buying appetite has been average this quarter and margins are not bouncing back to healthy levels. There are no tanks available at some key Chinese ports like Qingdao and the market is flooded with supply," a source from a Chinese trading house said.

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Some Khafji crude was also heard offered in the spot market this week, though further details could not be confirmed. Khafji crude is an alternative for Basrah Light crude buyers due to relatively similar quality parameters.

The offshore Al-Khafji oil field -- located in Saudi Arabia and Kuwait's Neutral Zone -- temporarily reopened this year after being shut since 2014. However, it was closed again throughout June.

Production had also resumed at Saudi Arabia and Kuwait's shared Wafra field after a five-year shutdown on July 1, Platts earlier reported.

Meanwhile, buying interest for key China-centric grades like Oman crude had dipped significantly for the current cycle, with sources saying that some refiners had "bought too much" previously.

Reflecting weaker Oman market sentiment, the DME Oman marker versus Platts M1 Cash Dubai spread had narrowed in recent weeks, Platts data showed. The spread averaged 41 cents/b in July so far, compared with 79 cents/b in June.

Meanwhile, the spread between front-month Dubai swaps and the INE's sour crude futures has also narrowed in recent days.

INE's most active September contract (SC2009) closed on July 23 at Yuan 301.1/b ($43.03/b) in the afternoon session at 3 pm Beijing time [0700 GMT], almost flat from its close of Yuan 301.3/b ($43.03/b) on July 22.

Over June, INE's August contract (SC2008) monthly close was at Yuan 292.4/b ($41.75/b), INE data showed.

The spread seen between INE's September price and the Platts September Dubai swap on July 22 was at minus 48 cents/b, narrowing compared with an average price spread of plus $1.80/b seen in June, the data showed.

Overall, spot market differentials for sour crude grades have trended lower in recent days, as Chinese refiners curtailed buying amid ample stockpiles and average refining margins.