Iraq to break with tradition in debut oil auction

Opec’s second biggest oil producer is experimenting with an alternative way to get more cash for its crude: putting its cargoes up for auction.

Iraq on Friday will try to sell a supertanker of Basra Light crude oil via auction on the Dubai Mercantile Exchange, in a move observers say is a response to intensifying competition with rival producers following a three-year slump in prices.

The method of selling the 2m barrel cargo marks a sharp break from the traditional long-term supply deals the Middle East’s biggest producers have relied on to sell their oil to traders and refiners, and comes as they remain locked in a battle to find new ways to get the best price from customers.

Saudi Arabia, Opec’s largest producer, is said to have looked at auctioning cargoes as well through the DME — a unit of US-based CME Group — as the exchange has established itself as a major trading venue for physical oil deals in the Middle East. Saudi Aramco, the kingdom’s state oil company, did not respond to requests for comment on its plans.

Ahmad Sharaf, chairman of the DME, said Iraq’s use of electronic auctions followed the sale of two cargoes by Oman since they launched the service in 2015, arguing there is a “need for reliable, regulated and innovative tools to sell crude oil in such a competitive market”.

Traders will be able to bid for the cargo on an electronic platform but will need to pay a premium to Iraq’s state oil marketer Somo’s official selling price for June. They will also need to agree to ship it only to Asia, a region where strong demand growth means Iraq hopes to win more customers.

Iraq is taking other steps to improve its options for selling crude, having formed a joint venturer between Somo and Litasco, the trading arm of Russia’s Lukoil.

“All the big producers are looking for new ways to sell their barrels,” said Olivier Jakob at Swiss oil consultancy Petromatrix.

In recent years consultants and industry analysts have encouraged national oil companies to set up relationships and joint ventures with trading companies in order to learn how to be more nimble and responsive to market needs.

It has become more important in an oversupplied market where traditional oil exporters have had to become more ruthless in order to secure crude sales as competition grows.

Saudi Aramco has created a trading division for its petroleum products without any external help, but has so far only made small steps to free up its crude sales, which account for more than one in every 10 barrels of oil in the world.

Last year Saudi Aramco sold a number of spot cargoes to independent refiners in China and Poland as it looked to beef up its response to Russian attempts to increase sales at its expense.

In 2006 Oman Oil Company teamed up with Vitol, the world’s largest independent trader, to establish Oman Trading International. After working together for almost a decade it became fully owned by the government of Oman in 2015.

Iraq has stepped up its sales as production has grown rapidly in the last few years due to investments made in the aftermath of the 2003 invasion.

The country’s production averaged almost 4.5m barrels a day in March, according to Somo director Falah Al Amri. Exports were close to 3.8m b/d, which includes 515,000 b/d sold by the semi-autonomous Kurdish region that sells its oil independently of Somo.