Kirkuk crude resurgence: Navigating new trade dynamics

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John Morley:

Hello everyone and welcome to the Platts Oil Markets podcast. I'm John Morley.

Now, after a deal was struck between the semi-autonomous Kurdistan regional government, federal Iraqi authorities and oil companies operating in the region, the Iraq-Turkey crude oil pipeline, which had been closed since March 2023, has reopened to deliver barrels of Iraq's Kirkuk crude to the Turkish port of Çeyhan. This is a pretty significant moment for the Mediterranean crude market with exports going forward expected to be in the range of around 180,000 to 190,000 barrels per day, which is not an insignificant amount for this region. The Mediterranean and Europe as a whole has been structurally short on sour crude ever since the pipeline closure, which remember came after the loss of most Russian Euros crude barrels coming into the region.

So there is huge interest among crude traders in the European region in Kirkuk's return to the market and how the first few cargoes will trade. We actually saw the first cargo loading in early October according to S&P Commodities at Sea data with a second cargo also loading the following week. In the longer term, Iraq is aiming to keep increasing production from the Kirkuk region, and at the start of October, two of its state-owned companies signed a contract with BP to commence the development of four oil fields in Kirkuk with an initial production target of around 328,000 barrels per day from those four fields.

But let's focus on the shorter term picture for now, and for this I'm delighted to be joined by European crude team editors, Luke Stuart and Ernest Puey to discuss what's happening here. Luke, if I can start with you, what's been the market response to Kirkuk's return so far?

Luke Stuart:

The return of Kirkuk has come at a time when the European sour crude complex has already been struggling with the long supply. The refining backdrop is bearish with the autumn turnaround season in full swing and the operating refineries in the region are already covered. There's also a tendency for sour growths to follow seasonal patterns with strength in summer months tapering out towards winter, following demand patterns for high silver products such as bitumen. The main result of this is that there has been little love shown for Kirkuk barrels offered for October.

Traders have valued current spot market availabilities for the grade at steep discounts to Dated Brent, and buyers have shown little interest for those prompt Kirkuk barrels. Refineries in the region will have arranged further supply around a month ago as the flows will be coming from further afield such as Northwest Europe or the Middle East. So buyers already have barrels en route for the period that Kirkuk is currently on offer. Of course, if it looks like a good enough value, their larger refining systems could probably be able to re-optimize their supply on a logistic site, but that's much easier said than done on such short notice.

John Morley:

Yeah, and it's quite an interesting time for these barrels to be coming back into the market, Luke. So the market has been waiting so long as we said for these Kirkuk barrels to return, but they've just so happened to come back into a bit of an oversupplied sour crude complex at the moment?

Luke Stuart:

Yeah, indeed. Even before Kirkuk came back, we've been seeing fellow European sours struggling, particularly the high-volume medium-sour grade Johan Sverdrup, which comes from Norway. Differentials for Johan Sverdrup have already been on a downward trend since mid-September on seasonal pressures and we've been seeing a real struggle to place those barrels. The return of Kirkuk is widely expected to compound that struggle by potentially displacing the sour crude from the Mediterranean and removing potential avenues for arbitraging Johan Sverdrup barrels out of northwest Europe. There are probably other knock-on effects on the grades from outside Europe, which have been used as Kirkuk replacements in the two years that the pipeline has been shot, but it will take longer to tell how the flows will settle on a wider scale.

John Morley:

Yeah, thanks for that, Luke. I think the knock-on impacts are going to be very interesting for us to monitor. So Luke, you've been mostly focused here on the Mediterranean sour crude angle and what's happening with the return of Kirkuk there.

But Ernest, if I can turn to you. So Luke's given a picture of potential weakness here in the sour market,. Has there been any other anticipated pressure on other parts of the European crude complex as a result of everything that's going on?

Ernest Puey:

Mm-hmm. Yeah. So John, that is a bit of a trickier question to answer. It is indeed possible for refineries to switch their crude slates in response to pricing dynamics between the sweet and sour crudes, but the feasibility of doing so is really highly dependent on the individual refineries itself. So it can be difficult to speculate on a wider impact until we can actually see it happen.

Now the unsold Kirkuk barrels will certainly weigh on the wider market. On the front line, we have been seeing bearishness creeping in onto some parts of the key Mediterranean grades, even though quality-wise they aren't quite a match for Kirkuk. You have the CPC Blend from Kazakhstan, which is more of an intermediate sulphur grade, even though it is frequently grouped with the sweets. You also have Azeri Light from Azerbaijan, which is a classic light sweet grade.

Now if switching does occur in favor of cheaper sours, well you would generally expect to see some impact on the intermediate barrels like CPC Blend before that filters through to the sweetest side of the complex. But again, it can be hard to attribute a standard relationship between two grades of rather differing viscosities because that density would be a large contributor to the distillation cut of a crude barrel.

Now on the other hand, you could even see refineries having to run more sweet grades to balance things out if a portion of your slate has been switched to become more significantly sulfurous. Kirkuk has a sulfur content of 2.24%. So it is certainly on the more sour side of the spectrum compared to say, Johan Sverdrup from Norway, which has a sulfur content of about 0.8% according to the Platts periodic table of oil. That could be a boost for your sweeter grades in the region. Although, of course, this is against the backdrop in Europe right now, which seems to be worrying of oversupply and having much more oil than we need in November.

John Morley:

Yeah, oversupply has definitely been a theme recently in global crude oil markets really. Ernest, if we can turn as well to an area you look at closely, which is the North Sea and the Dated Brent market. What are the key themes that are playing out at the moment there?

Ernest Puey:

Yeah, interesting that you say that. It's a global trend we've seen that recent collapse in the Dubai complex. Now there certainly are concerns of potentially more WTI Midland flowing into Europe following the collapse in Dubai, and that also comes off with fewer barrels flowing east for Midland.

Now, of course, on the Midland side of things, it'll boil down to the landed prices of Midland in Europe, but it certainly remains one of the key concern among the bears. Now add to that the recent volatility around global freight rates, particularly in the very large crude carrier segment, which was rattled by the introduction of new port fees in China. There's a lot of uncertainty out there, particularly in November right now, and if we look at the fundamentals within the shipping market, there are also concerns of whether those VLCC rates are able to hold higher.

All in all, it's a very unclear picture right now, and all this compounds an already poor arbitrage incentive to move local North Sea barrels to the East. That adds to the bearish tilt that were seeing in the market right now. So overall, I would say the market is monitoring things very closely, see how it all plays out, and indeed, it's going to be really interesting to look at how the reintroduction of Kirkuk settles into the refining complex going forward.

John Morley:

Yeah, a lot for us to consider at the moment. I think going forward as well, of course, we'll also have to think more about how EU sanctions on Russian crude could impact things and potential change in trade flows we might see as a result of that. But I think that's a topic for another day. So again, thanks very much to Luke and Ernest for joining me on the Platts Oil Markets podcast today.