Anticipated oversupply puts October Mideast OSP strategy under the microscope

Growing oil supplies, softer refining demand, and increasingly competitive arbitrage cargoes are pressuring Mideast NOCs to cut their OSPs. The challenge lies in finding the right balance between defending market share and avoiding a steep sell-off.

Key takeaways:

• Dubai M1–M3 structure points to at least a $0.4–0.5/bbl cut in medium sour crude OSPs for October-loading cargoes.
• Chinese refiners have stepped up procurement of November-arrival Brazilian and Canadian crude, while India is looking to take more September-loading Russian barrels.
• Ongoing stock building in China and lighter refinery turnarounds in India during Oct-Nov signal potential extra demand for Middle Eastern term cargoes, provided pricing remains favourable.
• Middle Eastern NOCs are unlikely to slash OSPs too steeply, wary that the market could interpret such a move as a sign of weakening fundamentals.

Middle Eastern oil producers are expected to trim their OSPs next month for October-loading cargoes, with Dubai backwardation easing and oil consumption set to taper off. The scale of the cuts, however, will be a delicate call, as it will signal the NOCs’ supply and marketing strategy in an anticipated oversupply environment. The decision will also serve as a key indicator for future global oil prices, with investors looking for a catalyst to break crude out of its current $65–68/bbl range.

The spread between front- and third-month Dubai contracts averaged around $2.5/bbl in August, about $0.4/bbl lower than July, pointing to at least a $0.4–0.5/bbl cut in OSPs for medium sour grades. However, the sharp drop in China’s nominations for Saudi September-loading cargoes underscored the price sensitivity of Chinese refiners, with 600–700 kbd of primary capacity slated for maintenance in October–November and cheaper crude remaining plentiful in the market. Chinese refiners have reportedly bought sizeable volumes of November-delivery Brazilian and Canadian crude, supported by rising production in the two American countries and softer US demand during the refinery turnaround season. With the Brent-Dubai EFS spread narrowing to near parity and Brent’s time structure weakening, China has also stepped up October-arrival purchases of West African crude and is expected to maintain the buying spree into next month. That said, Middle Eastern producers are facing increasing competition from West-of-Suez suppliers as well as from within the region itself, with deeper price cuts emerging as the most effective way to secure market share.

India’s state-owned refiners appeared to provide crucial support for Saudi Arabia’s September cargo sales, with IOC and MRPL requesting additional barrels amid uncertainty over Russian supplies. However, this supportive factor looks shaky for next month, as Indian refiners — both private and state-owned — have resumed Russian oil procurement and are likely to snap up larger volumes for October arrivals. Russia is expected to raise its crude exports in the coming weeks as Ukrainian drone attacks continue to degrade its refining capacity, with volumes projected to reach 3.5–3.6 mbd in September from around 3.2 mbd in August, although damage to the Ust-Luga terminal could cap actual flows. Indian refiners are expected to prioritize lifting the most economical barrels in the market in the near term, brushing aside geopolitical concerns, as the US has already imposed 50% import tariffs on Indian goods regardless of the country’s oil-buying behaviour. Urals is currently trading at about -$2.8 to -$3/bbl against Dated Brent on a delivered-India basis, according to Argus Media, making it roughly $6–$7/bbl more expensive than Saudi and Iraqi crude.

One upside for Middle Eastern producers is that India is forecast to process significantly more crude this autumn. No primary units at Indian refineries are slated for maintenance in October, compared with an average of 471 kbd in the same month during 2022–2024, according to IIR data. In November, IOC is scheduled to shut a 150 kbd CDU at its Panipat refinery, while HMEL plans to take the 242 kbd CDU at its Bathinda Guru Gobind Singh refinery offline for maintenance. Even then, the combined volume will remain below the three-year average of 732 kbd for November. At the same time, China’s state-owned refiners are expected to continue fulfilling their SPR commitments through Q4, although the exact volumes remain unclear to the public, suggesting a potential appetite for additional liftings of term cargoes should prices stay favourable.

Planned primary distillation unit turnarounds in India, kbd

Source: IIR

However, the downside of a large-scale OSP cut is that the market could interpret it as a signal that producers are acknowledging an oversupply situation, potentially triggering a sell-off. The risk is magnified by the timing of the OSP releases, landing just ahead of the industry’s key gathering in Singapore in the second week of September, where sentiment spreads quickly as hundreds — if not thousands — of market participants exchange views during meetings and receptions.

Of course, Middle Eastern oil producers are also likely to keep prices elevated by managing their actual supply to the market, much as they have done over the summer months. Yet achieving this would require a coordinated effort among producers — no easy task with heavy refinery maintenance also scheduled across their facilities.

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