Oil
Saudi Arabia’s decision to hike crude oil prices to Asian customers by the most in more than a year is both understandable and curious.
Saudi Aramco, the kingdom’s state oil company, lifted its official selling price (OSP) for June-loading cargoes for the main Arab Light grade to a premium of 25 cents a barrel to the Oman-Dubai benchmark, up $1.10 from a discount of 85 cents for May deliveries.
This was the biggest one-month jump since April 2015 and took the OSP to its highest since September last year.
The increase was more than the market expected, but it is understandable in the context of how the Saudis calculate their OSPs.
The contango structure of the Oman-Dubai market, where oil for later months is more expensive than that for immediate delivery, made it all but certain that the OSP would rise to reflect the higher prices for later-dated cargoes.
A rising premium for Brent crude oil over Dubai, as measured by the exchange for swaps , is another pointer toward an increase in the Saudi OSP for its Asian customers, who take about 60 percent of the kingdom’s output.
Brent’s premium over the Middle East marker rose as high as $3.98 a barrel on April 29, around the time Saudi Aramco would have been calculating its June OSPs.
This was up from $2.37 a barrel on March 25, the lowest point so far in 2016.Overall, while the increase in the OSP was above market expectations, it’s not out of line with Saudi Aramco’s established practices and history.
But that doesn’t mean it’s not a curious decision when viewed in the context of current oil market dynamics.
The past month saw an attempt by major producers to agree on the relatively modest step of freezing output fall apart after the Saudis insisted Iran be part of the deal, something the Islamic republic was unwilling to countenance until it has regained market share lost when its exports were restricted by Western sanctions on its nuclear programme.
The net effect of the scuppering of any producer deal was that the battle for market share amid ample global supplies continues.
By raising its OSPs quite aggressively, the Saudis are encouraging their Asian customers to look for alternatives.
Refiners may choose to not take full contracted volumes, instead seeking alternative crudes on the spot market or access the large amount of crude stored around the region.
They may also turn to Saudi Arabia’s main competitors, Russia, Iran and Iraq, to top up their July supplies, assuming these producers keep their crudes at prices below those being offered by Aramco.
Giving a leg up to your competitors doesn’t seem to fit neatly with the whole recent theme of Saudi Arabia’s oil strategy, which has been to maximise output and market share and worry less about the price.
Especially in the context of the kingdom’s new energy minister, Khalid al-Falih, stating on Sunday that the current policy would be continued.
“We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity,” he said in an e-mailed statement.
The Saudis may be thinking that the market supply-demand balance, especially in Asia, is tightening and that its price rise won’t hurt its market share as refiners will still need to buy full contracted volumes.
And there just may be something in this line of thinking, with many refineries, especially in North Asia, due to be back from annual maintenance by June and ramping up output to meet the peak demand of the Northern hemisphere summer season.
The narrowing contango market structure supports this view, and events also appeared to be playing into the Saudi’s hands, with the wildfire threat to Canada’s oil sands output.
Brent crude futures rose as much as 2.4 percent in early Asian trade on Monday, reaching $46.48 a barrel, up from the $45.37 close on May 6.The Saudis wouldn’t have known, and couldn’t have predicted, the fire situation in Canada, but perhaps they may have discerned that the market isn’t quite as oversupplied now as it was three to six months ago.
If this assessment is correct, then the hike in the OSPs won’t be the last, but much will depend on what message Asia’s refiners send back to the Saudis, whether they will wear the price increase and take full volumes, or whether they will try to limit purchases from Aramco as cheaper alternatives are available.
The writer is a Reuters columnist.
