Iraq says Asia crude discounts offer no basis for oil price war

Iraq says Asia crude discounts offer no basis for oil price war

ANTHONY DIPAOLA and GRANT SMITH

BAGHDAD, Iraq (Bloomberg) -- Iraq said its decision to deepen the discount for January sales of its main crude to Asia provides no support for claims that producers are waging a price war.

Pricing for next month’s shipments of the Basrah Light grade to Asia is “based on the market structure for both oil products and crude oil,” Iraq’s Oil Marketing Co. said Dec. 11 in an emailed statement. “The widened contango in crude oil prices in Asia was the major reason behind the cut.”

Middle Eastern crude producers are competing with counterparts in Latin America, North Africa and Russia for buyers in Asia. They’ve lowered price differentials and maintained output, raising speculation that they’re seeking to defend market share.

Saudi Arabia, the world’s biggest oil producer, lowered its official selling prices to Asia and the U.S. on Dec. 4 after the Organization of Petroleum Exporting Countries agreed last month to maintain its output target. Crude is trading in a bear market as the highest U.S. production in three decades exacerbates a global glut.

“It’s semantics,” Olivier Jakob, managing director of Zug, Switzerland-based Petromatrix GmbH, said by phone. “You want to be competitive. The first one to price is Saudi Arabia, and for a while now, Iraq’s been making sure it prices very competitively to them.”

OPEC Second-Largest

Iraq, OPEC’s second-largest producer, widened the discount for Basrah Light to $4/bbl compared with the regional benchmark, the Oil Ministry’s marketing arm known as SOMO said Dec. 8. The country produced 3 MMbopd last month and exported 2.51 MMbopd, SOMO said Dec. 11 in a separate email.

The cut in price levels by $1.50/bbl from December followed Saudi Arabia’s reduction in its January differentials to Asia. Basrah Light to Asia has sold at a discount to Saudi Arab Medium crude since November 2012, according to data compiled by Bloomberg.

Iraq’s discount in Asia is the biggest in at least 11 years, while Saudi Arabia widened the differential on its Arab Light grade to the most in at least 14 years. Kuwait lowered its price formula to Asia Dec. 10, for its deepest discount in six years. Fellow OPEC member Iran hasn’t published prices for next month.

Persian Gulf oil producers sell most of their crude under long-term contracts to refiners. Most of the region’s state oil companies price their oil for sale at a premium or discount to a benchmark.

Crude producers generally consider demand and the profit refiners earn from fuel sales when setting price differentials, Jakob said. Oil producers may set deeper discounts in a contango, when a commodity costs more for future delivery than it does at present, to limit the variation in selling prices from one month to the next, he said.