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Saudi price rise surprises Asia
Saudi Arabia's unexpected increase in its official crude oil selling price (OSP) differentials to Asia next month could keep refiners away from the spot market or force deeper discounts for rival grades as runs are kept low on weak demand.
- Reuters
- Published: 23:35 December 4, 2008
Singapore: Saudi Arabia's unexpected increase in its official crude oil selling price (OSP) differentials to Asia next month could keep refiners away from the spot market or force deeper discounts for rival grades as runs are kept low on weak demand.
Dealers, who had expected the world's biggest exporter to deepen discounts to record levels for many of its crude grades, responded to the overnight OSP news with a mixture of surprise and dismay, saying it would hurt margins.
Saudi Aramco narrowed flagship Arab Light's discount to Oman/Dubai quotes by $0.40 a barrel to an $0.85 discount, lifting it from a record-deep $1.25 discount.
Unexpected
Refiners had expected a cut of between $0.10 and $0.50 for the grade.
"I don't understand why the Saudis lifted all prices to Asian users. Most refineries are having or considering run cuts, demand is sluggish, the spot market is trading in discount," said a term lifter.
Weakening oil demand could have prompted Saudi Aramco to be more aggressive next month in the West, where it cut most prices, while its sales are more secure in Asia where refiners have in the past often complained about Middle East producers imposing an "Asian premium" on them.
Reuters calculations show that latest changes in differentials - up in Asia and down in the West - flatten the difference in outright prices between the different regions.
Lower supplies to Asian refiners, which Saudi Aramco notified of 5 per cent supply cuts for this month, may also have prompted the oil kingdom to raise differentials to compensate for lower volumes, traders said.
"It is very unexpected, quite puzzling," said a trader with a refiner, who had forecast cuts of between $0.50 and $1.00 for most crudes.
But the higher OSPs, which will also set the trend for higher OSPs for Iranian, Iraqi and Kuwaiti crude, which together with Saudi crude, make about 8 million barrels per day of term Middle East crude more expensive, could prompt refiners to stay away from the spot market amid weak demand.
Saudi Aramco also tends to set more competitive OSPs in Europe and in the US, where its crudes compete with other grades on the spot market, such as Russian Urals and US Mars crude.
The Arab Medium and Heavy OSPs were raised by an even larger $0.55 and $0.50, respectively.
Asian margins
"It is very unexpected. Asian margins are the worst in the world," said a Singapore-based trader.
Reuters data showed refining margins in Asia last month to have fallen sharply and to average lower than in other producing regions.
Dubai crude refined in a simple refinery in Singapore last month would have yielded negative margins of $1.18 a barrel.
The same crude, cracked, led to positive, but still low, margins of $1.42 a barrel last month.
Saudi Aramco had been expected to trim prices by between $0.10 and $1 after the fuel oil crack spread slid, gas oil cracks held steady and naphtha plunged to record-low discounts versus Brent.
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