Iraq’s Oil Marketing Company (SOMO) has informed its customers it is unable to compensate for a big jump in freight costs for crude oil cargoes heading to Europe and the Americas in April, a copy of a notice seen by Reuters showed on Thursday.
The decision was made because of “the dramatic and unprecedented changes in the freight rates in parallel with the steep drop in crude oil prices,” the company said in the notice that was issued to customers.
SOMO could not be immediately reached for comment.
Freight costs jumped globally because more ships are now needed to deliver oil, with Saudi Arabia and other Middle East producers ramping up output after talks to extend a production cut deal between the Organization of the Petroleum Exporting Countries and Russia broke down.
SOMO had been offering buyers for cargoes to Europe and the Americas a rebate if freight costs rose above a certain level, sources with knowledge of the matter said.
The rebate was aimed at gaining market share in those regions, they said. The people with knowledge of the matter declined to be identified because of the sensitivity of the matter.
SOMO’s decision to revoke the rebate has taken buyers off guard as April-loading cargoes have already been allocated and traded in the market, the sources said.
In its notice, SOMO recommended that customers who also have refineries in Asia should move their cargoes to the east instead of west.
SOMO could also review nominations for April cargoes that it had received earlier if it could not reach an agreement on the freight rebate with customers, it said in the notice.
“It’s obvious that buyers in Europe and the Americas won’t choose (Iraq’s) sour crude as they can buy cheaper oil from Russia and the United States,” one of the sources said.
This could mean that more Iraqi oil could be diverted to Asia, he said.
“We’ve heard people consider cancelling April (Iraqi oil) cargoes due to freight re-evaluation from SOMO,” a source in the European oil market said.
“It is very good timing for Urals as April cargoes have just started to trade.”