Iraq’s oil price change plan faces resistance

Source:Reuters-Global Times Published: 2017/8/27 17:18:39

Asian refiners fear longer lead times will cause growing risk

Iraq's proposal to change the way it prices crude oil in Asia faces resistance from refiners who fear that longer lead times between pricing and deliveries will expose them to more risk.

Iraq's state oil marketer SOMO surprised traders last week by seeking feedback on plans to switch its Basra crude benchmark in Asia to pricing based off the Dubai Mercantile Exchange (DME) from January 2018, dropping quotes based on assessments by oil pricing agency S&P Global Platts.

The move would affect the price of about 2 million barrels per day of crude oil supplies to Asia, mainly shipped to India, China and South Korea.

"The change is significant and will be watched very closely by not only Middle Eastern producers but everyone involved," said Oystein Berentsen, managing director at Strong Petroleum in Singapore.

The new method would price Basra crude using the monthly average of DME Oman futures two months before the oil loads. Other Middle Eastern producers like Saudi Arabia and Kuwait price their oils based on the loading month.

This means Iraqi crude loading in October would be priced off DME's futures contracts in August. This poses a risk to buyers, who would only be notified by mid-September if they have successfully bid for a cargo, making it hard for them to hedge against price changes in advance.

"We are not supportive. They need to fix their [supply] program first before trying to change the benchmark," said a senior crude buyer at an Asian refinery.

The different timing of the pricing compared with other producers also makes it difficult to compare values among crude grades, traders said.

Some buyers were concerned that almost 80 percent of the crude used to price DME Oman futures goes to China, reflecting the economics of just one Asian buyer.

"Moving right away to DME Oman is very ambitious. I think it will cause a few hiccups because technically it's going to be very hard," said Adi Imsirovic of Britain's Surrey University Energy Economics Centre.

SOMO has not commented on its motivation for the changes, but switching to DME could extract higher prices for the marketer. Monthly averages for DME Oman held about $3 a barrel above Platts Oman-Dubai assessments between March and July this year.

Some traders support the move. Knowing Iraq's crude prices two months before delivery allows traders holding Basra cargoes without fixed destinations more time to decide where to sell their oil, based on regional price differences.

Whether SOMO will go ahead with the move has yet to be determined as the company is expected to resolve issues raised by customers, a source familiar with Iraq's plan said.

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