Special topic: The Asian medium sour oil market has remained unimpressed despite reduced cargo availability, underscoring weak demand in Eastern Asia. This, along with increased domestic consumption in the Middle East, has largely contributed to the 1.6 Mbd decline in OPEC+ oil exports in June. Saudi oil exports have reached their lowest level in over a decade.

Upstream: OPEC+ production dipped to its lowest of the year in June as Saudi Arabia, Russia and Iraq all cut production, seeking to put an end to past months' overproduction and confronting tangibly lower Asian demand for term barrels. Meanwhile, China's upstream bonanza is running out of steam and India would need more investment to sustain the slight momentum it experienced in early 2024.

Flows: Middle Eastern crude flows fell to a 3-year low in June with most of the downside coming on the back of a decline in availability of medium-density grades, potentially setting the stage for tighter sweet-sour spreads in the months ahead as Middle Eastern crude burning rises further in July.

Differentials: Prices for Middle Eastern medium sour grades slackened in June due to underwhelmed demand and ample supplies. Meanwhile, the potential reopening of the West-East arbitrage window and lucrative Russian crude prices will continue to draw interest away from regional grades for Asian refiners. All these factors suggest another, and likely larger, cut in OSPs for August.

Special topic: Weak Asian demand hampers OPEC+ oil production and exports

Crude oil exports from major OPEC+ producers significantly decreased in June compared to the previous month. Saudi Arabia, in particular, experienced a substantial decline, with shipments falling by 930 kbd to 5.42 Mbd, the kingdom's lowest monthly level since at least 2013, the earliest data available from Kpler. This drop is even lower than during the COVID-19 pandemic and much lower than the average of 6.4 Mbd recorded in the first five months of the year. Potential disruptions at ports or other infrastructure are not behind it, prompting us to reduce our assessment of Saudi crude production by 250 kbd to 8.87 Mbd, in-line with the kingdom’s production target including its 1 Mbd voluntary cuts.

Interestingly, Saudi Arabia is not the only OPEC+ member reducing its exports. Other Middle Eastern producers have also seen significant decreases: Iraq (-239 kbd), Kuwait (-140 kbd), Iran (-48 kbd), and the UAE (-4 kbd) have all exported less oil. Additionally, Russian exports slightly decreased by 27 kbd m/m to 3.58 Mbd (see more details in the Flows section). Brazil, another major OPEC+ producer, also saw its exports fall by 320 kbd m/m, partly due to upstream issues at the Tupi and Buzios FPSOs.

OPEC+ seaborne oil exports variation in June m/m, kbd

Source: Kpler

Several factors may explain this broad decrease in exports. Firstly, seasonality plays a role with stronger domestic consumption and higher crude burn in the Middle East. In Saudi Arabia alone, refinery runs increased by 207 kbd to 2.7 Mbd, supported by the return of SASREF’s two 150 kbd CDUs and SATORP’s 200 kbd second CDU from maintenance. Additionally, temperatures in Riyadh have risen to nearly 50°C, leading to increased crude burn, which we estimate has risen by 81 kbd to 553 kbd this month. We expect both refinery runs and crude burn to continue rising in Saudi Arabia in July, but only by a combined 110 kbd m/m. The situation is similar in Iraq and Iran, where refinery runs have jumped and crude burn, as well as HSFO burn for power generation, have increased.

However, seasonality may not be the only reason behind the drop. The fact that all major OPEC+ producers have reduced exports could potentially indicate concerted action aimed at tightening the market just as the summer season starts in the northern hemisphere. Overcompensation makes sense, even for Saudi Arabia, which we believe slightly overproduced in the first five months of the year by an average of 192 kbd. However, if this were the case, the alliance would have likely made an official announcement to maximize potential price gains. Riyadh would have also benefited from such an announcement before offering new Aramco shares to local and foreign investors. This makes this reasoning quite unlikely, albeit not impossible.

Saudi Arabia crude production vs targets, kbd

Source: Kpler. Production targets with the phase-out of November 2023 voluntary cuts starting from October 2024 until September 2025.

The third and most sensible reason, in our view, is the state of demand in Asian markets. The reduction in output and exports could simply be linked to low nominations from Asian buyers. China’s economy continues to disappoint, with the latest PMIs below 50, indicating contraction. India’s imports of Saudi oil have been declining for four months in a row and reached a 10-year low in June at just 428 kbd, compared to an average of 707 kbd in 2023. Imports of Basrah crude also fell by 247 kbd m/m to 800 kbd, below the 2023 average of 907 kbd. With the monsoon season approaching, Indian oil imports aren’t likely to rebound much, although the market is now trading September-loading cargoes when the monsoon season is over.

Bleak demand is the main reason why the Asian medium sour crude market has not rebounded despite the lower availability of cargoes, especially medium sour grades like Arab Medium, Arab Light, and Basrah Medium. The cash Dubai/Dubai futures spread (M1-M3 spread) averaged $0.93/bbl in June, down by about $0.60/bbl from the previous month. Consequently, oil producers are likely to reduce their OSPs by a similar amount in the coming days (see more details in the Differentials section). Chinese refiners have been heavily re-selling cargoes on the spot market. The weakness is to be found in products cracks given Asian refinery runs are still holding up relatively well, up by 330 kbd y/y in June to 31.6 Mbd (excluding the Middle East).

Asian refinery runs (excluding the Middle East), Mbd

Source: Kpler, JODI

Upstream: Downward recalibration of OPEC+ supply tightens Asian markets as domestic increases from China and India dry up

OPEC+ production has dipped on the back of lower Saudi, Russian and Iraqi production figures, dropping to the lowest aggregate output rate of 2024 to date at 34.3 Mbd. The steep decline in Saudi exports, down to a mere 5.3 Mbd in June after trending above the 6 Mbd mark every single month this year so far, has been a combination of a downward correction in supply, ending the country’s slight overproduction of late, maximized refinery runs and peak crude burn kicking in earlier than usual amidst unprecedented heatwaves. Russia, too, has been slow to cut production in line with its OPEC+ commitments, however warmer weather in Western Siberia has at last allowed producers to curtail their output rates. Iraq remains the Pandora’s box of OPEC+ as SOMO consistently reports production below the country’s production target of 4 Mbd, however increasing output from Iraqi Kurdistan, already testing the 300 kbd threshold, keeps the country’s total supply above its target. In our books, we see Iraqi production averaging 4.1 Mbd in June, rebounding slightly to 4.14 Mbd in July.

Iran crude and condensate production, Mbd.

Source: Kpler.

As Iran is headed towards a presidential run-off on July 5, deciding between the reformist candidate Masoud Pezeshkian and hardliner Saeed Jalili, the country’s crude oil production has been relatively shielded from political turmoil. Even though the country’s oil minister Javad Owji has pegged Iran’s crude output at 3.6 Mbd and flagged a potential upside to 4 Mbd by the end of the Iranian calendar year in March 2025, we believe that the upside is limited. Inasmuch as Iran can pride itself on bringing new production capacity to market – the most recent example being the second phase of the Yadavaran oil field which boosted the country’s production capacity by another 40 kbd (and the field’s prospective plateau to 150 kbd) – it is limitations of demand that will be keeping crude-only production around 3.2-3.3 Mbd over the upcoming months. Given the downside risks stemming from the US presidential election, we believe that Iran’s 2025 annual average would remain rangebound at 3.3 Mbd. To put it bluntly, US sanctions will not be able to derail currently existing exports to China, however, they would put a lid on how far Iran could lift its production.

China crude and condensate production, Mbd.

Source: Kpler.

One of the main drivers of upstream growth in China, the tight oil deposits of Xinjiang, seems to have exhausted its potential upside. The country’s westernmost province has posted five straight y/y declines for the first time since early 2017, with production trending around the 680 kbd mark. Across China, it’s really the offshore zones that are still providing for incremental supply, with crude-only production in Q2 averaging 4.15 Mbd, less than 50 kbd higher y/y. For the first time on record, production from Tianjin province surpassed the 800 kbd mark in May 2024 (at 814 kbd), exactly 50 kbd higher y/y. Simultaneously, Guangdong has trended 25 kbd higher in H1 2024 compared to the same period last year, driven by production gains in the South China Sea.

Attesting to the overall upside coming from the Bohai Bay and South China Sea, China’s offshore specialist CNOOC has been the most active in terms of new fields being commissioned. The state-controlled firm launched the Enping 21-4 and Wushi 23-5 oil fields in South China Sea over the past four weeks. Adding a production capacity of 5.5 kbd and 18 kbd once they reach their assumed plateau in 2026, both offshore fields will boost China’s light oil output, something that has been sorely needed on the back of maturing legacy assets. Replicating the Johan Sverdrup success story, the Wushi 23-5 field also prides itself on being the first Chinese producing asset to be powered by clean electricity that is supplied from continental China.

India's crude production and output split by main producing companies, kbd.

Source: Kpler.

When it comes to the second-largest oil market in Asia, India is moving closer to mark its first y/y increase in crude output after ten consecutive annual declines. We expect India’s 2024 production to come in at 599 kbd (up 9 kbd compared to last year, so the upside isn’t particularly hefty), exactly where it stands in the latest published national statistics for May 2024. Following first oil from the KG-DWN-98/2 deepwater block in the Krishna-Godavari basin in the first weeks of this year, the remainder of the year would see incremental supply coming from the project tilt the balance towards growth, however only till the ONGC-operated project reaches its production plateau of 45 kbd. Looking further out, some positive momentum might be created by the Chola-1 exploration well that India’s state-controlled ONGC started to drill in May. Spudded at a water depth exceeding 1.7km, Chola could be the first large discovery in the ultra-deepwater segment of the Cauvery basin, adding some gravitas to India’s Open Acreage Licensing round held in 2020.

Flows: Middle Eastern crude flows reach 3-year low in June amid a decline in availability of medium grades

Middle Eastern producers saw a strong decline in their exports in June, with crude and condensate flows from the region averaging only 16.3 Mbd last month. This represents a decline of around 1 Mbd m/m and marks the lowest level in three years (see chart below).

The decline in Middle Eastern crude flows can be attributed to a combination of factors, including a rise in Middle Eastern crude demand, higher crude burning due to power generation, and potentially even some (unofficial) market management by OPEC members (see special topic for more information).

Middle Eastern crude and condensate exports by country, Mbd

Source: Kpler  

The decline in Middle Eastern crude flows is arguably coming at the right time for crude markets. Crude prices came increasingly under pressure in early June, with the Dubai benchmark even falling to a multi-month low of only $76 at the time. This starkly contrasts the roughly $100/bbl Saudi Arabia needs to balance its budget (assuming the kingdom produces an average of 9.3 Mbd of crude in 2024).  

Downward pressure for prices has been coming from a weakening in fundamentals, with one of the largest buyers of crude in the region, China, seeing its growth slow down compared to last year and other key importers, such as Japan, struggling to keep crude demand elevated. In fact, Japanese crude demand will average only 2 Mbd in July, representing a decline of 50 kbd m/m versus the multi-year low reached the month prior and remaining some 450 kbd below the 5-year average (see chart below).  

Japanese crude demand, Mbd

Source: Kpler

The latter has kept a lid on Japanese crude imports, which fell for a third consecutive month in June and averaged less than 2.1 Mbd for the first time since July 2021. The decline has come largely at the expense of Saudi Arabia, with Japanese imports from the country easing almost consistently since late 2023. In fact, Japanese crude and condensate imports from Saudi Arabia settled below 900 kbd in June, marking a decrease of 250 kbd versus Q4 2023 levels and representing a 2-year low.  

Saudi Arabia has remained the largest contributor to the decline in Middle Eastern flows in June, with the kingdom’s crude and condensate flows averaging a mere 5.3 Mbd last month, which represents a decrease of around 800 kbd m/m and remains roughly in line with pandemic-induced lows observed in June 2020. Declines were also observed for other Middle Eastern OPEC members, such as Kuwait, Iraq, and the UAE, albeit to a lesser extent.  

The decline in Middle Eastern crude exports has come largely on the back of medium-density crudes, which accounted for roughly 800 kbd of the total decrease in flows (exports of medium-density grades came in at an average of around 6.6 Mbd in June). This has helped tighten medium-density crude markets and may pave the way for a narrowing in regional sweet-sour spreads in the months ahead. This is particularly true when we consider that Middle Eastern crude burning for power generation is expected to rise further this month, which will keep crude availability pressured over the summer months.

Differentials: Summer chill: slump in Dubai market signals larger OSP cuts

Middle Eastern medium sour crude was in retreat for a second month in June as sluggish refining margins and high inventories disincentivised refiners from placing large purchasing orders. Market structure crunched with the Dubai M1/M3 spread narrowing to an average at $0.93/bbl from $1.58/bbl in May, while the term price for August-loading Qatari crude Al-Shaheen, a bellwether for the region’s medium sour grades, was set at a five-month low of around $1.20/bbl following its closely watched monthly tender. Despite weaker prices, physical cargoes were slow to clear, largely as Chinese refiners scaled back spot purchases. The trading arm of China’s top refiner, Unipec, was seen buying fewer medium grade cargoes, such as Upper Zakum, in June than they typically do. China’s private-owned Rongsheng also surprised the market by opting for arbitrage cargoes in its monthly tender instead of the widely anticipated Upper Zakum. The refiner likely bought three cargoes of Canadian TMX crude, Access West Blend, for September-delivery from Maquarie and Conoco Philips at discount of around $6/bbl against ICE Brent.

The ample availability of sour crude also put a lid on premiums. Abu Dhabi’s state-owned ADNOC has been increasing exports of its light sour crude Murban over the past months following production expansions in the UAE and the completion of a crude flexibility project at its Ruwais refinery, which enables the plant to process heavier crude and free Murban for exports. Some 1.652 Mbd of Murban is scheduled for exports in August, compared to 1.53 Mbd for January-loading. The oil firm plans to further raise Murban exports to 1.643 Mbd in September and 1.665 Mbd in October. Meanwhile, ADNOC’s trading arm appeared reluctant to buy Upper Zakum from the spot market in June for its Ruwais plant, according to market participants. Our data showed that the intakes of Upper Zakum by Ruwais fell to 210 kbd in June from as high as 361 kbd in March. Consequently, the premiums of Murban and Upper Zakum declined by $0.76 and $0.95 month-on-month to $0.83/bbl and $0.85/bbl against Dubai in June, respectively.

Upper Zakum and Murban differentials against Dubai, $/bbl

Source: Argus Media

All five grades in the Dubai basket were nominated via Platts’ market-on-close platform in June, leaving the flagship Middle East crude at parity with each other. A total of 24 convergences were made in June, the highest number since February. Each convergence occurred after 20 partials (500 kb) were traded, comprising 11 Oman, five Murban, four Upper Zakum, three Al-Shaheen, and one Dubai. Unipec was the biggest seller at the Platts MOC, while Total, Mitsui, and Mercuria were among the most active buyers.

As the backwardation of Dubai narrowed and the spot premiums of other sour grades plummeted to six-month lows, Middle Eastern oil producers are set to cut their Official Selling Prices (OSPs) for August-loading cargoes in the coming days. We anticipate the cuts to be 60-70 cents, larger than the prior month, especially given the lack of significant improvement in refining margins in Asia. While middle distillate cracks appeared to be bottoming out toward the end of June, it remains to be seen if the rebound can be sustained after the resumption of nearly 1 Mbd refining capacity from overhauls this month. Meanwhile, the West-East arbitrage window have reopened in late June after briefly closing in the prior week. With the Brent-Dubai spread jumping to a two-month high of $1.76/bbl on Jun 28 and the Dubai-WTI spread rebounding to above $4/bbl, Asian refiners may reignite their interests in hauling crude from the Atlantic Basin.

Regarding Russian crude, discounts for medium sour Urals in West Coast India narrowed in June due to tighter supply, following an increase in Russia’s domestic throughput. However, Urals crude remains around $5/bbl cheaper than Basrah Medium and nearly $6.5/bbl lower than Arab Medium. Indian refiners are expected to continue maximising their intake of Russian crude while keeping liftings of Saudi and Iraqi crude at low levels, thereby capping Middle Eastern oil prices.

Landed medium sour grade prices in West Coast India vs Dubai, $/bbl

Source: Kpler based on Argus Media

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