The Middle East sour crude complex is likely to come under bearish pressure on news of Kuwait and Saudi Arabia agreeing to restart production from the 300,000 b/d offshore Khafji oil field, but the market was slow to react Wednesday in the absence of a clear timeline for the resumption.
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Analysts say the plan to resume production in the Saudi-Kuwait neutral zone field also raises a broader question on the commitment of some major oil producers to freeze output to support prices.
"...even the idea of a freeze [in oil production] may be tested by [the] announcement that Saudi Arabia and Kuwait are preparing to restart the 300,000 b/d Khafji oil field. Without some clarification to the effect that overall output won't be increased, even the freeze idea may not hold," Citi analyst Timothy Evans said in a note to clients on Tuesday.
OPEC members Saudi Arabia, Qatar and Venezuela last month agreed with Russia to maintain production at January levels, if other oil producers joined. Major oil producers are due to meet again in Doha, Qatar, on April 17 to discuss a potential freeze in production.
The planned restart of Khafji has the potential to weaken benchmark Dubai crude's value relative to Brent and weigh on spot differentials for medium and heavy sour grades such as Iraq's Basrah crude, traders said Wednesday.
But the Brent/Dubai Exchange of Futures for Swaps or EFS spread was higher Wednesday morning in Asia, compared with the day before, reflecting uncertainty over the potential restart.
"We have heard this news about the restart before but no mention of when," said a Singapore-based crude trader.
The May Brent/Dubai EFS was offered at $2.99/b Wednesday morning in Asia on the Intercontinental Exchange, narrower than the $3.16/b assessed at Singapore market close Tuesday.
"I think it will help to ease bullish sentiment over the next few months and as a buyer, hopefully, cap the hot heavy sour crude market especially for Basrah Heavy," said a trader with a North Asian refiner.
The restart of the Khafji oil field, meanwhile, could take months instead of weeks, following the suspension of production in October 2014, sources said Wednesday.
The Khafji oil field production could come back "in a relatively prompt manner" once restart work begins, Chief Economist at Japan Oil, Gas Metals National Corporation Takayuki Nogami said.
"The Khafji crude production could be restarted in one or two months after commencing restart work," Nogami said.
NEW IRAN CRUDE
The news of Khafji's potential restart comes in the context of plans by Iran to start selling a new stream of heavy sour crude that would likely add to the overall supply of such grades, weighing down on their price.
The heavy sour grades such as Khafji are favored by complex Asian refineries that can get the most out of high-residue oil using bottom upgrading units.
A source at Japanese refiner Cosmo Oil said Wednesday the company would be open to buying Khafji crude on a spot basis as feedstock for its 29,000 b/d coker unit at the 100,000 b/d Sakai refinery, western Japan, if the price were competitive.
National Iranian Oil Company is drawing up plans to start exporting a heavy grade of crude oil of 25-26 API from the West Karoun fields in the next few months, a source familiar with the matter said.
"NIOC has already talked with some customers...to pass them the sample for the first time in the form of a trial cargo," the source said.
Market participants said NIOC was still in the process of setting up the infrastructure required to support export of the grade as well as a pricing structure, given the intense competition from Iraq.
Since its launch last year, Iraq's Basrah Heavy crude has become hugely popular among Asian refiners that can handle its high sulfur content, especially because of a lucrative de-escalator system that pays the buyer back if the quality of the grade is below standard.
The Basrah Heavy standard is set at 26 API and the buyer receives 60 cents/b per API drop in quality and pays out at the same rate if the quality is better than standard. Similarly, for Basrah Light, the standard is set at 34 API and the buyer receives 40 cents/b per API drop in quality.
Resumption of Khafji and start of exports from West Karoun crude would likely intensify the battle between Middle East producers including Saudi Arabia, Iran and Iraq, which have already taken an aggressive stance in pricing their respective medium and heavy sour barrels for Asian customers in the last few months to capture market share.
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