Physical Crude Cargoes Drop as Middle Eastern Supply Rises

Physical crude oil cargoes are selling at steep discounts around the world, changing trade flows as markets come under pressure from fast-rising Middle Eastern supply with Iran set to boost sales following a temporary reprieve from U.S. sanctions.

The discounts, the biggest in years in some cases, follow the signing of a 60-day interim deal between the U.S. and Iran aimed at ending the war that began on February 28. The agreement has allowed some shipping to resume in the Strait of Hormuz, through which a fifth of global oil and liquefied natural gas shipments moved before the conflict.

Tehran is also ramping up oil exports, seeking sales beyond China, after Washington temporarily lifted sanctions as part of the deal.

The release of cargoes stranded inside the Gulf and a wave of crude offers from Abu Dhabi National Oil Co, Kuwait Petroleum Corp and Iraq's SOMO have also boosted prompt supply and depressed Middle East benchmarks Dubai, Oman and Murban to discounts. Asian refiners, which typically buy crude two months in advance, have already booked cargoes for delivery up to August.

"Refineries in the East have already been well supplied for the next two months and have no need for the incremental barrels, leading to a very weak market and Dubai spreads in contango," said June Goh, a senior oil market analyst at Sparta Commodities.

Contango is a price structure in which prompt contracts are cheaper than those for later delivery, a dynamic that typically indicates a perception of ample near-term supply.

MIDDLE EASTERN BENCHMARKS IN DISCOUNTS

Physical crudes around the world trade at either premiums or discounts to pricing benchmarks. When the Iran war started and the strait was effectively closed, many crudes hit record premiums on concern over tight supplies.

Cash Dubai slipped to a discount of 27 cents a barrel on Tuesday, after peaking at a more than $60 premium in March, while discounts for Oman and Murban widened to 96 cents and 67 cents, respectively, Reuters data showed. 

ADNOC has sold at least 48 million barrels of spot crude so far this month for June-August loading, boosting regional supply.

The collapse in Middle Eastern crude prices has made Gulf oil cheaper against Brent, enabling energy majors ExxonMobil, Eni and TotalEnergies to send supertankers of crude such as Abu Dhabi's Murban and Upper Zakum to Europe, traders said.

On the other hand, weak Middle East prices have shut the arbitrage window for Atlantic Basin crude to Asia, traders said. Spot differential for U.S. West Texas Intermediate Midland crude has flipped from a premium a week ago to a discount of about 45 cents. 

"We're expecting U.S. crude export premiums to Asia to erode and AB (Atlantic Basin) differentials to soften as the weeks progress," Rystad analyst Janiv Shah said.

U.S. crude exports to Asia are set to ease in the third quarter after hitting a record high of 2.634 million barrels per day in May, ship tracking data from Kpler showed.

EUROPE, WEST AFRICA DISCOUNTS WIDEN

Discounts for European and West African grades have also widened this week with the increase in Middle East supply.

North Sea Brent crude, one of the six grades that can set the value of the dated Brent benchmark, was offered on Tuesday at a discount of 95 cents a barrel to dated Brent, the largest discount since 2022 and a sharp swing from a record premium in excess of $17 a barrel in April, according to LSEG data.

"Europe is becoming the clearing point for crude that either lost its eastern outlet or now screens cheap enough to travel west," analysts at Kpler said in a note.

For West African grades, Eni has sold Angolan Nemba crude for August loading to Glencore at $7.95 a barrel below dated Brent while ExxonMobil offered a cargo of Angolan Hungo for loading on August 6-7 at a discount of $4.05 per barrel to dated Brent, traders said.

Pricing agency S&P Global Energy Platts assessed on Tuesday that Congolese crude Djeno was at a discount of $10.845 per barrel to dated Brent, the biggest in its records dating back to 2013. Angola's Nemba was priced at a six-year low discount of $7.95 per barrel, it added.

(Reuters)