Oil producers in the Middle East are facing fresh export challenges as Iraq's recent decision to slash discounts on its crude grades has led to buyer resistance, leaving shipments stranded within the Persian Gulf.
Iraq's state-owned marketer SOMO last week dramatically reduced the price discounts offered on its crude, effectively raising prices. This came after months of offering competitive deals designed to lure traders back to lifting Iraqi barrels, a strategy implemented to offset high freight costs and the dangers associated with transiting the Strait of Hormuz.
The fallout from the Iran conflict has hit Iraq particularly hard, squeezing vital export revenues and straining state finances while also highlighting the nation's heavy reliance on the narrow maritime chokepoint. Baghdad now faces a delicate balancing act, requiring full revenue from its cargo sales while needing to set prices at levels that remain attractive enough for traders to engage.
A pricing document reviewed by financial analysts shows that SOMO trimmed the official discounts for Basrah Medium and Basrah Heavy crude loading this month by $9 to $10 per barrel compared with August levels. September's Basrah Medium cargoes are now priced at a discount of $15 to $18 per barrel against the benchmark, a significant tightening from the $25 to $27 discounts offered during the previous month.
SOMO's director general, Ali Nizar, acknowledged last week that friction exists between the state's pricing expectations and those of its trading partners. In local television remarks, he confirmed rejecting trader requests for discounts of up to $30 per barrel. However, multiple trading sources indicate that with freight rates still elevated and navigation risks persisting, the smaller discounts offer insufficient incentive to arrange liftings.
A government spokesperson on Friday stated that Iraq is actively seeking tankers to load within the Persian Gulf and transit the Strait of Hormuz, a move that could theoretically reduce reliance on intermediaries provided sufficient vessels can be secured. Yet traders note that when cargoes clear the gulf, the operational capability to manage shipping logistics remains in their hands, presenting another hurdle for Baghdad to overcome.
The SOMO predicament underscores a persistent hesitation among buyers to take delivery inside the gulf. While several regional producers have shifted to ship-to-ship transfers in the Gulf of Oman to deliver outside the strait, the crude must still first navigate out of the contested waters. Saudi Arabia, which continues to offer cargoes from within the gulf, kept its next-month pricing steady, defying market forecasts of a substantial increase.
Traders report that SOMO has offered buyers the alternative of lifting outside the gulf, but this option has yet to gain traction, partly because current price levels fail to attract firms willing to undertake the shuttle risks through Hormuz. The official quotations, based on in-gulf loading, leave almost no room to absorb the extra hauling expenses and risk premiums involved in such operations.
The perils of moving crude out of the gulf remain acute. A Saudi-flagged tanker was damaged in an attack earlier this week, resulting in the deaths of two crew members. Baltic Exchange data from Friday shows daily earnings for a very large crude carrier from the gulf to China surged to $704,025, the highest level recorded since at least February 2017.
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