February 10, 2021

Anticipating crude oil market trends with the launch of a new grade: Iraq's Basrah Medium case study

How the release of a new grade can impact consumer behavior and supply and demand behaviour

Earlier in the year, Iraq’s SOMO launched a new grade called BasrahMedium. The release of a new grade is not a common event in the oil and gas industry and is an opportunity for many players to evaluate and adapt their positions. The new product’s quality and volumes are likely to impact consumer behavior and how competitors react, potentially leading to changes in volumes and prices of other competing grades, particularly in the Middle East.

It could also boost Iraq’s oil production and exports. In 2015, SOMO launched the Basrah Heavy grade in anticipation of increased output from fields yielding heavy crude. The launch of Basrah Heavy allowed the country to unleash more production from heavier oil reservoirs, leading to a 25% increase in output. Initially marketed with a 26°API gravity, Basrah Heavy helped the country compete with Saudi Arabia’s Arab Heavy blend (27 °API)and target markets where this type of oil is favoured,such as India.

In the case of BasrahMedium, Iraq is launching a new grade to offer more consistent crude quality to its customers and to avoid further mismatch between deliveries and contracts.Indeed, because the share of heavy oil in Iraq’s total country production is growing fast, its BasrahLight blend sometimes dipped as low as 27.3 °API in 2020 compared to 33.7 °APIon paper. Buyers had been complaining about crude quality and requested discounts as a result. Therefore, the launch of BasrahMedium will help Iraq’s SOMO secure market share from key customers while also boosting production in the medium term.

One month after the launch of its new grade, the quality of Iraqi grades have stabilised with Basrah Light averaging around 31.4 °API, BasrahMedium around 28.3 °API and Basrah Heavy around 23.4 °API.

Iraq's Exports by grade

Iraqi and Saudi oil exports to India
How supply disruptions of specific gradescan impact pricing in the oil market

A potential consequence of the launch of BasrahMedium is an increased supply of medium sour crude sourced from the PersianGulf. Such an increase is likely to impact regional OSPs as well as the Brent-Dubai crude spread, a good proxy for the light sweet-medium sour crude balance.

The Brent-Dubai spread has narrowed from +$3.97/bbl in late March 2018 to a negative spread of -0.50/bblin February 2019. What was the main reason behind this market move? The US exit from the Iran nuclear deal in May 2018 and US sanctions on Iran and Venezuela in November 2018 and January 2019 which removed a major chunk of heavy and medium sour oil from these countries in the oil market.

Although the US mathematically replaced these volumes, incremental US oil reaching the market is mostly light sweet oil from shale reservoirs.

US, Venezuela, Iran oil exports since Trump election
Nymex Brent-Dubai spread
What this represents for the Crude oil trading industry

The release of this new grade will influence supply and demand. Market players and financial players need to planahead of market movements to minimise potential negative impact and maximise profit. In these circumstances there is always a layer of uncertainty with regards to how these events can unfold.

Preparing ahead of market changes

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