SOMO cancels China crude term deal, resells at higher price

London (Quantum Commodity Intelligence) – Iraq's SOMO has canceled a fixed-price supply deal with China's state-owned Zhenhua Oil Co after crude prices increased by around 50% since the deal was signed in December, S&P Global Platts reported, quoting a senior Iraqi oil official.

The deal was for 4 million barrels of Basra crude oil per month running from July 1, 2021 to June 30, 2022, involving an upfront payment of around $2 billion dollars based on crude prices of $50 per barrel in early December.

Brent crude prices have since rallied to more than $75/b, while Middle East benchmark Dubai is currently above $73/b, according to Quantum data.  

SOMO's flagship Basra Light grades usually trade at a premium to Dubai.

"For the time being we may say it is not applicable at this stage because of oil prices, which are high and we are in a better position and we are even generating additional profits in excess of what the Iraqi budget needs," SOMO's deputy director general Ali al-Shatari told Platts. "The oil has been allocated already."

Fixed-price term deals are very rare in oil markets, particularly on large-volume crude transactions.

"Fixed-price sales make no sense. You might get some fixed-price deals in say the bitumen market, but even then it's common for one side to walk if the price goes against them," commented one trading source.

A cash-strapped Iraq sold the oil on a prepayment basis to raise emergency funds.