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Spot demand for Iraqi crude fades as SOMO cracks down on resales

London — Customers of Iraqi crude have been repeatedly warned against the resale of European destination-linked vessels of Basrah Light and Basrah Heavy with several receiving letters from Iraq's State Oil Marketing Organization.

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Over the past few weeks, a number of key Iraqi crude buyers in Europe have received letters from SOMO, reminding them of their contracts that prohibit resales, according to trading sources.

These notices have put the brakes on the spot trading activity for Iraqi crude, the bulk of which takes place in Europe. This slowdown in activity comes as regional demand for such medium sour crudes has grown due to the loss of Iranian barrels.

"SOMO sent letters to all companies asking them to mention their refineries or where they have participation in refineries and asking them to abide by the destination," a trader active in the marketing of sour crudes said.

SOMO is currently finalizing its term contracts for next year and few companies are willing to risk a disruption to their contracts.

"I've not heard of any trade in two weeks ... and as well, I see reduced interest from [major tender buyers in Greece and Turkey]," another trader said.

The market for Iraqi barrels is separated into destination-free and destination-restricted cargoes by SOMO, with more restrictions being placed on region-specific cargoes, although these are unofficially sometimes traded when a company chooses to re-optimize cargoes.

SOMO has gradually become less flexible in its term contracts, hoping to weed out the influence of traders and control the sales of its crude to only refineries and end-users.

A SOMO representative was unavailable for comment. CLAMPING DOWN If a European lifter has a European refinery, then it cannot sell its destination-Europe cargo onwards, sources said.

"In principle, SOMO's cargoes with restricted destination are not for resale," a source at a European refiner said. However, if a company is allocated another region-restricted cargo, but does not have refinery capacity in that region, then it can be resold.

Sources added that SOMO had also recently asked companies to send through their refinery details, including location, in order to determine the requirements for 2019 volumes, which will likely be used to keep tabs on any potential resold volumes.

Trading sources said that they were waiting to see how next month's trading cycle goes, although some pointed out that SOMO previously had mostly turned a blind eye to the growing spot market for Basrah Light.

"[This] could be an issue going forward, depends on how strict it is going to be. It sent the letter from November [allocations], so it will the first month to see how it enforces the destination restrictions," a crude trader said.

"We have to see what happens. To limit too much for a country looking to increase production, it could be a risky business," a third trader said. CHANGE IN STRATEGY Sources saw this move by SOMO as part of its strategy to expand its trading and reform its business model.

Previously, Iraq was less strict on the resale of its cargoes as it looked to increase the popularity of its crudes and grow its export capacity.

National oil companies like Saudi Aramco and Kuwait Petroleum have always had strict destination restriction clauses in their term contracts.

Basrah Light is one of the main medium, sour grades that arrive in the Mediterranean and most major European refineries take at least some of the grade in their crude slates with some heavily dependent on it.

Europe's market share in terms of consumption is the smallest out of the three regions (Asia, Americas, Europe) at around 20-25% of overall volume, but it can often be seen as a key swing destination.

Roughly 600,000 b/d of Basrah Light and around 80,000-100,000 b/d of Basrah Heavy have made their way to Europe in recent months, according to S&P Global Platts estimates. --Eklavya Gupte, eklavya.gupte@spglobal.com

--Gillian Carr, gillian.carr@spglobal.com

--Edited by E Shailaja Nair, newsdesk@spglobal.com