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(Reuters) – A chasm in pricing crude oil has emerged — barrels constrained by choke points are being offered at sometimes massive discounts while those that can move freely command generous premiums.
The gap continues to widen as the Middle East conflict worsens, with Yemen’s Iran-aligned Houthis making rapid advances to threaten complete control of the Bab el-Mandeb strait and Saudi Arabia shutting down its pipeline to the Red Sea after an attack reportedly launched from Iraq.
That’s spurred Brent futures higher in recent days. A three-month high of $109.97 a barrel was hit on September 11, up 57% since dropping to $70.14 on July 2, which was the lowest price since the conflict started on February 28 when the U.S. and Israel attacked Iran.
What is worth noting is that if Brent futures are taken to delivery, the crude grades in the contract are loaded either in Europe or the United States and are not subject to the Middle East choke points.
But oil that loads in the Persian Gulf and cannot get out without a trader taking significant risk to ship it through the Strait of Hormuz is being offered at substantial discounts.
Iraq’s Basrah Medium crude for October loading is being offered at a discount of $43.06 a barrel to Murban, a regional benchmark grade produced by Abu Dhabi National Oil Company (ADNOC), according to data compiled by commodity price reporting agency Argus.
The Basrah Medium price is for a free-on-board cargo loading in Iraq, while the Murban price is for oil at Fujairah, a port in the United Arab Emirates at the end of the pipeline that bypasses the Strait of Hormuz.
Qatar’s Al-Shaheen, another crude that can only get to market through the strait, is being offered at a discount of $24.92 a barrel to Murban.
OUTSIDE HORMUZ PREMIUMS
Some crude oil is getting through the Strait of Hormuz, although exact volumes are difficult to track, but estimates are around 10 million barrels per day (bpd), or about half pre-conflict levels.
Once crude is out of the strait, it is being offered at a premium, with Argus assessing the ship-to-ship transfer price of ADNOC’s Upper Zakum at a premium of $7.00 a barrel to regional benchmark Dubai crude for October loadings and $13.25 for November cargoes.
What the price assessments are showing is that even if crude can move through the Strait of Hormuz, the cost of doing so is now a significant portion of the total delivered cost for an Asian refiner.
On the flip side, crudes outside the Middle East are commanding increasing premiums, and they get wider the closer the oil is to major consumers in Asia.
The most expensive crude in the daily Argus assessment is Pyrenees, a medium-sweet grade produced off Australia’s Northwest coast.
It was assessed at $138.04 a barrel on September 11, a premium of $33.43 a barrel to the close of $104.61 for Brent futures.
Pyrenees was at $70.59 a barrel on February 27, a discount of $1.89 to Brent’s close of $72.48 on the day before the Iran conflict started.
This means Pyrenees is up 96% since the start of the war, outperforming the 44% increase for Brent futures.
Angola’s Cabinda oil shows a similar pattern, ending at $118.46 a barrel on September 11, up 62% from the close of $73.08 on February 27.
The fact that it hasn’t performed as well as Pyrenees reflects the increase in freight costs, which have been surging as tankers have to account for rising bunker fuel costs and also the longer journeys as the market works around the disruption caused by the Middle East.
Editing by Edwina Gibbs
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