Singapore — Spot trading activity in Iraqi crude continued to shrink this month as the country's State Oil Marketing Company's efforts to gain control over the secondary market for Basrah crudes edged out other spot sellers. Since October, SOMO has cautioned its long-term crude buyers against reselling cargoes in the spot market, a move that traders say was meant to give SOMO and its joint venture companies a greater share in the lucrative spot market for Basrah Light and Heavy crudes.
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"The message is quite clear. They want to be the ones to sell any Basrah on spot," a Singapore-based crude trader said.
SOMO did not respond to an email seeking comment.
Conventionally, the secondary market for spot barrels of Basrah crude has comprised a mix of destination-free cargoes sold by equity holders such as international oil companies known as Technical Service Contractors -- and destination-restricted cargoes often resold by term lifters.
But in recent years, SOMO has adopted a more active role beyond production, often tapping new avenues such as the Dubai Mercantile Exchange and the Platts Market on Close assessment process to sell cargoes of Basrah in the spot market.
The company's latest move to restrict term lifters from becoming spot market sellers isn't unusual. Most Middle Eastern producers prohibit resale of term barrels. SOMO is merely implementing restrictions already embedded in its term contracts, which are its primary means of selling the majority of its crudes.
For the market though, the fresh enforcement on spot resale has resulted in a dearth of liquidity in the December trading cycle for destination-specific barrels, such as those intended for Europe, the US, or Asia.
Since the directive from SOMO last month, some term-holders have reduced or skipped nominating December cargoes, traders said.
This is because anybody who buys Basrah buys it with the flexibility of being able to resell in case they cannot take it into their system, a crude trader said.
"If the buyer loses this flexibility of resale, there is no incentive to continue buying Basrah," he added.
Asian refiners that relied on D-East cargoes in the past may now have to find alternatives, seek more crude from other term suppliers or compete in the market for destination-free cargoes of Basrah with their counterparts in Europe and North America.
"Korean and Japanese refiners will struggle ... as they can't buy D-East cargoes anymore," a second Singapore-based trader with a Chinese company said, referring to cargoes restricted to Asia.
While Iraq is now emulating a marketing strategy employed by other Middle Eastern oil producers, in some respects SOMO is breaking new ground.
Besides online sale of cargoes on DME and Platts MOC process, the company is forming strategic alliances to help market its crude and gain market share.
Last month, SOMO announced a joint trading venture with China's state-owned Zhenhua Oil, according to traders in Asia. This follows a joint partnership set up with Russia's Lukoil in Dubai in 2017 called LIMA Energy.
The two trading companies will pave the way for SOMO to sell its crude directly in the spot market. The recent restrictions on the resale of term cargoes will likely further strengthen the JVs.
Asian refiners have increasingly been approaching SOMO-Zhenhua JV as well as LIMA Energy for additional Basrah barrels for December, traders said.
Recently, cargoes of Asia-bound Basrah Light crude were picked up by Taiwanese and South Korean refiners for December loading from SOMO and SOMO-linked companies at a premium of around 50-60 cents/b to the Asia Basrah Light OSP, sources said.
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