Iraq Says Asia Crude Discounts Offer No Basis for Price War

By Anthony DiPaola and Grant Smith

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 yesterday in an e-mailed 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, feeding 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 at 30 million barrels a day. 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 yesterday 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

Brent slid 30 cents, or 0.5 percent, to $63.38 a barrel on the London-based ICE Futures Europe exchange at 12:09 p.m. Singapore time. West Texas Intermediate fell 75 cents to $59.20.
Iraq, OPEC’s second-largest producer, widened the discount for Basrah Light to $4 a barrel compared with the regional benchmark, the Oil Ministry’s marketing arm known as SOMO said Dec. 8. The country produced 3 million barrels of oil a day last month and exported 2.51 million barrels daily, SOMO said yesterday in a separate e-mail.
The cut in price levels by $1.50 a barrel 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.
Members of OPEC, which supplies 40 percent of the world’s oil, are waging an internal price war to preserve their share of an oversupplied market, Iraqi Oil Minister Adel Abdul Mahdi said Oct. 30.

Kuwait Pricing

“There is a price war within OPEC,” Abdul Mahdi said in Baghdad at a parliamentary session broadcast on state-run television. “The market’s fundamentals have changed, with an extra 3 million barrels a day of crude entering the market at a time when growth in China and India has slowed.”
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 on 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.