Singapore: Saudi Arabian heavy crude sold to Asia may be headed for its highest level in 22 months relative to benchmark Middle East grades as the kingdom capitalizes on growing demand for fuel oil.
Arab Heavy crude for November may cost $1.40 a barrel less than Oman and Dubai grades when prices are announced next week, according to the median estimate of nine refiners surveyed by Bloomberg. That would be the smallest discount for the country's densest crude since January 2010 and compares with $2.15 less than the benchmark grades for October cargoes.
Orders from Japan and China for fuel oil, a residue of crude refining typically used for heating and shipping, are allowing state-run Saudi Arabian Oil (Aramco), the world's biggest crude exporter, to charge more for its lowest-quality grades at a time when oil prices are falling.
Brent crude, the benchmark for two-thirds of the world's oil, dropped 16 per cent from this year's peak on speculation that US and Europe consumption will weaken. Returns from producing Asian fuel oil, so-called crack spreads, were at their strongest in 13 months on September 23.
"Fuel oil cracks have been strengthening," said Ehsan Ul Haq, a senior market analyst with KBC Energy Economics in Walton-on-Thames, England, who correctly predicted this month that Saudi Arabia would raise October cargo prices. "Strong fuel oil cracks mean Saudi Arabia would have to increase prices for heavier grades."
The average loss from refining fuel oil was $4.15 a barrel on September 23, the smallest since August 20, 2010, according to PVM Oil Associates in London. The crack was $4.29 yesterday. Producers typically accept losses from fuel oil because it's a residue of the refining process that firms can offset with the profit from higher-value products such as gasoline, diesel and naphtha.
Fuel oil may cost an average of $4.50 less than crude in the fourth quarter, according to Standard Chartered.
The Saudis may also set higher prices next week for Arab Light, their biggest crude export, Extra Light and Arab Medium, according to the survey.