Kuwait and Iran on Wednesday joined Saudi Arabia in slashing the price of their heavy crude exports to the deepest discounts in at least nine years, seeming to support Opec's view that the world has enough supplies.
The 35- to 50-cent mark-downs on the differential for July shipments hardly compensates for the surge in benchmark prices – US light, sweet crude is up $5 a barrel so far this week alone – but reflects the poorer profits for simple refiners who are unable to convert heavy Gulf crudes into higher-value fuels.
Kuwait cut the official selling price (OSP) of its crude by 40 cents a barrel to a discount of $4.20 a barrel versus the Oman and Dubai benchmarks for Middle East shipments, the deepest since at least late 1998, according to data. Iran deepened Iran Heavy's discount by 47 cents to a $3.92 discount, a state oil company official said.
That came after Saudi Arabia, the world's biggest exporter, last week cut its
Arab Medium OSP by 35 cents to a $3.70 discount to Oman/Dubai, the lowest since at least the late 1990s, in an attempt to appease customers who are suffering from deepening losses caused by producing residual fuel oil.
The price of fuel oil, the lowest-value major product of the refining process, has failed to keep pace with soaring crude values on falling demand, in turn curbing refiners' appetite for the heavy Gulf grades that yield more of it than lighter crudes.
"Those who have cokers and can refine heavy crude are enjoying their crude. It's the simple refineries that are struggling with low margins," a source with a Middle East producer said.
In Singapore, the crack spread for fuel oil versus Dubai swaps stood at a steep $28.70 discount on Wednesday, doubling since end-January. The heavy product has slumped as supplies built up in Singapore where storage capacity has sharply increased over the past year, while demand in China, the largest fuel oil buyer worldwide, cooled on soaring outright prices.
The discounts also highlight a growing split between amply supplied fuel oil and a tight market for products like diesel, which is causing prices for light and heavy crudes to diverge.
Saudi Light crude differentials are at near their highest premiums ever, driven higher after the gas oil crack rose to records of more than $40.00 a barrel to Dubai swaps last month. The Organisation of the Petroleum Exporting Countries has rebuffed consumer nations' calls for more output, saying high prices had nothing to do with a shortage of supply.
Saudi oil minister Ali Al Naimi said last month Saudi Arabia had boosted oil output by 300,000 barrels per day and would achieve 9.45 million bpd in June to meet rising demand and to compensate for lower output from other producers.
But refiners expressed little interest in additional crude supplies, especially if these were of the heavy type.
"We asked for full term volumes, not for extra volumes," said one trader. "Supply is not tight. Heavy sour crudes are under pressure this month."
Crude oil rises
Crude rose in New York on speculation US inventories dropped for a fourth week, raising concern supply may fall short during the summer driving season.
Crude stockpiles probably declined last week by 1.5 million barrels, according to a Bloomberg survey of analysts. Inventories have lost 19 million barrels since the week ended May 9. Prices also gained as China said it imported 25 per cent more oil in May to assist repairs in southwestern regions struck by an earthquake.
Crude oil for July delivery climbed as much as $1.82, or 1.4 per cent, to $133.13 a barrel in after-hours electronic trading in New York.