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Iraq Faces Resistance on Oil Price Change

Iraq Faces Resistance on Oil Price ChangeIraq Faces Resistance on Oil Price Change

Iraq’s proposal to change the way it prices crude oil in Asia faces resistance from refiners who fear that longer lead times between pricing and deliveries will expose them to more risk.

Iraq’s state oil marketer SOMO surprised traders this week by seeking feedback on plans to switch its Basra crude benchmark in Asia to pricing based off the Dubai Mercantile Exchange from January 2018, dropping quotes based on assessments by oil pricing agency S&P Global Platts, Reuters reported.

The move would affect the price of about 2 million barrels per day of crude oil supplies to Asia, mainly shipped to India, China and South Korea.

“The change is significant and will be watched very closely by not only Middle East producers but everyone involved,” said Oystein Berentsen, managing director for Strong Petroleum in Singapore.

The new method would price Basra crude using the monthly average of DME Oman futures two months before the oil loads. Other Middle East producers like Saudi Arabia, Kuwait and Iran price their oils based on the loading month.

This means Iraqi crude loading in October would be priced off DME’s futures contracts in August. This poses a risk to buyers who would only be notified by mid-September whether they had successfully bid for a cargo, making it hard for them to hedge against price changes in advance.

“We are not supportive. They need to fix their supply program first, before trying to change the benchmark,” said a senior crude buyer at an Asian refinery. He declined to give his name because he is not allowed to talk to media about market specifics.

The different timing on the pricing compared with other producers also makes it difficult to compare values among crude grades, traders said.

Some buyers were concerned that almost 80% of the crude used to price DME Oman futures go to China, reflecting the economics and fundamentals of just one Asian buyer.

 

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