Iraq's State Oil Marketing Organization may base future pricing of spot oil sales on benchmarks rather the current practice of linking them to its official selling prices to eke out more profit for its crudes, its deputy director general told S&P Global Platts.
"All options are open," Ali al-Shatari said in a Sept. 1 interview. "If the market is really strong, why not link our spot cargoes directly to the benchmarks. It might happen to change to that mechanism when the market conditions allow so not to make losses but also to make a better profit out of it."Several Middle East crude grades trade in the spot market against benchmark Platts Dubai crude assessments, which are also widely used in the official selling prices set by the region's producers. Since the launch of ICE Futures Abu Dhabi exchange in March this year, Abu Dhabi grades including Murban, Das Blend, Upper Zakum and Umm Lulu also trade in the spot market against the Dubai benchmark.
Iraq, OPEC's second biggest oil producer, usually issues a monthly tender for spot cargos that are normally sold at a premium or discount to its OSPs.
OSP `sensor'For now, Iraq is using the OSPs basis because it wants to gauge interest and pricing for its crude, Shatari said.
"We are keeping this tool (of linking to OSPs) for the time being not only on selling for a better price but also as a sensor for OSPs," Shatari said. "With the current fast changes and the volatility in the market, we would need a sensor to tell us how our OSPs are preforming."
SOMO crude grades in the spot market have recently traded at sharp discounts to the respective OSPs, especially for Basrah Heavy, sources say.
In August, a September-loading Basrah Heavy cargo was sold at a discount of around $2.3/b-$2.5/b to its official selling price while trades for Basrah Medium were at discounts of around 30-50 cents/b to its OSP, traders said.
Prompt loading dates as well as a lengthy loading program along with weaker demand from Asian buyers for the Medium and Heavy sour grades were stated as key reasons for the drop in spot differentials, sources say.
In July, SOMO issued a tender offering 2 million barrels of August loading Basrah Medium crude which saw limited buying interest from Asian refiners, sources said.
SOMO also offered Basrah Medium cargoes during the Platts Market on Close assessment process and received bids in discounts with the highest bid at a discount of 15 cents/b to the grade's OSP. SOMO decided not to award the tender.
Spot cargo scheduleApart from weak demand for medium and heavy grades, the higher official selling prices of Middle East crudes also weigh on sentiment among Asian buyers, traders say.
Market participants are waiting for the issuance of OSPs by Middle East producers for October with a sharper cut expected compared to previous months which is necessary to make the region's crude more affordable to buyers, a trader in Singapore said.
SOMO also may in the future issue spot tenders for cargoes loading two months ahead instead of the usual one month ahead schedule, Shatari said.
"Basically, for the spot cargoes we do a kind of review and study on market conditions and where the market is in need for more crude and where the market is not in need of more crude," Shatari said.
"Issuing a tender for the next month or issuing a tender for a month after depends on how far we can go to give trading opportunities for bidders."
October-loading cargoIn August, SOMO issued a tender for 2 million barrels of its Basrah Medium crude for loading in October and also provided some incentives to entice buyers.
"Taking into account that the market wasn't very strong over the [loading] months of September and August, we did a tender for October, two months ahead so that to give even more opportunities for the bidders to participate and to purchase," said Shatari. "The incentives and tender terms and conditions should be changeable and flexible in order to reflect what the market needs and what the customer needs so that we can sell that cargo with the best prices we can get."
SOMO, however, decided to sell the cargo to a term customer to get a better price for it. He declined to name the customer
"We sold it to one of our customers based on the term contract because the tender didn't really give a good price for that cargo and some of our customers prefer to take it to their own refineries rather than trading it," Shatari said. "Whenever there is strength in one side of the market, we will capture it."
