Things have taken a bad turn for the Middle East. Asia, by far the largest demand hub for Saudi Arabia, Iraq or the United Arab Emirates, seems to be going through the same stage of weakness that Europe and the United States were in the spring. Not buying enough, depleting crude inventories and generally expecting flat prices to drop lower before they come back. Perhaps there is no better example of this than China, a country that was supposed to lead summer demand recovery yet ended up buying the least crude this year as its maritime imports dropped to 10 million b/d. Such a general trend of weaker demand and sluggish physical activity inevitably impacted the Middle Eastern futures market, with the Dubai cash-to-futures spread shedding 60 cents per barrel compared to May and averaging only $0.95 per barrel. Seeing that refinery margins have been struggling to move any higher – to be fair they did not decline either – the market was preparing for a substantial price cut for August-loading cargoes across the Middle East.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average).
Source: Saudi Aramco.
Saudi Aramco did exactly what was expected. Having already cut formula prices for July cargoes, it lowered Asian OSPs across the board. The lighter Arab Extra Light and Arab Light were slashed by 60 cents per barrel, whilst the heavier grades Arab Medium and Arab Heavy saw an even bigger downward correction, by 70 cents per barrel. With this, Asian formula prices were basically back to May pricing levels, with Arab Light trading at a $1.80 per barrel premium to Oman/Dubai and Arab Medium set $1.25 per barrel higher than the benchmark. The lower pricing was in great measure brought about by very low nominations from term buyers. Total volumes departing for China in June averaged only 1.15 million b/d, the lowest monthly nomination since the first full-impact COVID-19 month of March 2020, whilst India hit a three-year low with a mere 530,000 b/d of June loadings. Even though both countries lifted more in July, the sentiment remained weak and Saudi Aramco needed to react.
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Chart 2. Formula prices of Saudi cargoes bound for Northwest Europe by selected grades (vs ICE Brent).
Source: Saudi Aramco.
Compared to Asia which did not really experience notable weakness in buying up until June this year, Europe was already one phase ahead – it saw an all-round collapse of differentials earlier and was rebounding strongly into the summer. Saudi Aramco lifted its Europe-bound August formula prices by a hefty (and uniform) 90 cents per barrel. By not cutting when regional differentials were collapsing and hiking when conditions were ripe, Aramco managed to bring its European OSPs to the highest level since December 2023. Arab Light is at a $4 per barrel premium to ICE Brent, and even Arab Heavy is trading at a premium to the European futures benchmark. That would seem extraordinary in the spring months, but it has gone down well for the summer. In fact, according to market reports all the European term deal holders nominated full monthly amounts for August, suggesting that even despite high prices demand for medium sour crude remains high.
Chart 3. Kuwait Export Blend official selling prices into Asia, compared with Arab Medium and Iranian Heavy (vs Oman/Dubai average).
Source: KPC.
Kuwait doesn’t necessarily share the concerns and qualms of Saudi Arabia, after all the main reason why the country’s exports have been going down so heavily in the past years stems from its own refining. Not only is the 615,000 b/d Al Zour refinery firing on all cylinders, the 230,000 b/d Duqm refinery in Oman that the Kuwaiti state oil company co-operates has reached full production capacity, too. Depending equally on South Korea, China, and Vietnam as its key contractual partners, KPC nevertheless followed Saudi Aramco’s suit and slashed the Asian formula prices for Kuwait Export crude by 70 cents per barrel, taking it to a $1.25 per barrel premium over the Oman/Dubai average. Even the extra light KSLC grade, relatively minor in terms of volumes as KPC has been loading an average of three tankers per month, was cut by 60 cents per barrel vs the July OSP, fully in line with Arab Extra Light.
In the meantime, Kuwait has registered probably one of the largest oil discoveries of past years, claiming that the offshore al-Nokhatha field contains some 2.1 billion barrels of light oil and 5.1 trillion cubic feet of natural gas. As Kuwait has allocated a $300 billion upstream investment budget for its production capacity increases but genuinely lacked any high-impact greenfield project to work on, the field might be a game-changer for the Middle…
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