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Middle East crude oil market rides out Iraq conflict for now Weak refining margins, ample supply dampen Asia demand

SINGAPORE, June 18, (RTRS): The conflict in Iraq has not caused the Middle East crude market to rally so far, with cash differentials instead falling, held down by lacklustre demand in Asia and ample supply from Europe and Latin America. The Middle East sells most of its crude to Asia. Crude from Abu Dhabi, Oman, Qatar and Bahrain, to load in August has been sold at lower differentials than the previous month, despite a lightning offensive by Islamist insurgents in northern Iraq which drove up Brent futures by 4 percent last week. Iraq exports the bulk of its crude from southern Basra where the flow of oil has not been affected so far, but there are concerns that the instability could cause the second-largest OPEC producer to miss output targets.

“People are not pricing in Iraqi barrels missing in the short term,” said a trader at a large oil company.
The trader said, however, prices could be affected longer term if instability persisted. In the Middle East crude market, spot premiums for al-Shaheen, a suitable replacement for Iraqi Basra Light, slipped nearly 40 cents a barrel from the previous month. The premium for medium sour Oman has also fallen to just under $1, down from about $1.60 in the same period last month. Premiums for light sour grades, such as Murban, also weakened as thin profits from processing crude into oil products meant some Asian refiners kept operating rates low, curbing demand for crude. Asia is also due to receive more crude from Europe, Africa and Latin America as rising production and lower demand in those regions push excess supplies eastward.

North Sea crude exports will resume from late June as Vitol and Trafigura have sold 4 million barrels of Forties to North Asian buyers so far, traders said. Offers of Latin American grades, displaced by rising US shale oil output, are also rolling into Asia. These grades, typically bought by China and India, are able to replace Middle Eastern crude. “We see a lot of offers from that region to cover July and August,” a trader at a South Asian refiner said, adding that Colombian grades Castilla and Vasconia had been offered. Lower prices, attractive credit terms and rising output have attracted Asian buyers to Iraqi crude. China’s Iraqi crude imports in the first four months rose 31 percent to 604,331 barrels per day (bpd) after jumping 50 percent in 2013 from the previous year.

India’s Iraqi crude imports rose nearly 19 percent to average 561,000 bpd in 2013. In the medium to long term, Iraqi crude buyers, especially China and India, may have to re-think their purchasing strategy if the Iraqi conflict restricts growth in output. The International Energy Agency has warned Iraq’s oil growth targets look increasingly at risk. Some oil firms are pulling foreign staff out of Iraq, prompting concerns that production could decline in future months. The trader at a large oil company said the market had factored in a risk of attacks on oil infrastructure in the long run as Brent crude futures in 2015 had risen, narrowing their price gaps with contracts in the remaining months of 2014. Saudi Arabia, the world’s top exporter, is expected to step in with more supply given it has spare capacity, while other Gulf producers Kuwait and Abu Dhabi will also be tapped. “Kuwait, Saudi Arabia and ADNOC (Abu Dhabi National Oil Co) would be immediate options for government companies,” a Basra Light buyer based in India said, adding that he may look for a cargo from West Africa to replace the supply. “There should be replacements around, maybe a bit more costly, like Saudi grades,” a Chinese trader said. A second Chinese trader said Iraq was not expected to become as unstable as Syria and Libya currently are. In the worst scenario, he said if Iraq’s 2.5 million bpd production is halted then premiums for Middle Eastern oil would soar and China could then think of releasing strategic reserves.

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