The decision by Saudi Aramco to reverse most of its discount for crude shipped to Asia is being viewed as a sign that the Middle East’s biggest producer is now more keen to support oil prices. There may be an element of truth in this reasoning, but there is likely a range of factors at play, and when taken together the Saudi decision looks reasonable and logical.
Saudi Aramco raised its Official Selling Price (OSP) for December cargoes of its main Arab Light grade to Asia to a discount of 10 cents a barrel to regional benchmark Oman/Dubai last Monday. This was an increase of 95 cents a barrel from November cargoes, and reversed the bulk of the $1 decline implemented for shipments loaded in October.
At the same time, prices for North American buyers were cut, with Arab Light for December dropping 45 cents a barrel to a premium of $1.60 over the Argus Sour Crude Index. This seems like a clear signal that the Saudis have ended price discounting for their main clients in Asia, while cutting them for North American refiners.
But some context makes it likely that this simple explanation isn’t the full story. Firstly, the Saudi OSP to Asia is still at a low level. As recently as July it was at a premium of $2.25 a barrel to Oman/Dubai, and even the increase for December still leaves it at a discount.
Discounts in the OSPs are a fairly rare event, and December will be the third straight month that this has happened. The last time the Saudi OSP was at a discount to its benchmark for Asia was four years ago.
Another factor is the relative price of Oman/Dubai to other crude benchmarks, most specifically the global marker Brent.
A good proxy for this is the Dubai-Brent exchange for swaps, which has recovered in recent weeks from the lowest levels in four years.
Brent was at a $1.75 a barrel premium to Dubai swaps last Monday, up from $1.33 on October 14, but still well below the 2014 peak of $4.96 on June 13.
It’s not a coincidence that Saudi Aramco raised its OSP for Asia for December cargoes, as the time period when the company would have been assessing prices coincided with an improvement in the Brent-Dubai spread.
The earlier sharp fall in the Brent-Dubai spread resulted in an equally strong decline in the OSP, and it’s widely known that the Saudis try to use OSPs to ensure relative price parity of cargoes destined for different customers in different regions.
Another reason cited by analysts, myself included, for the drop in the OSPs from September to November was the Saudis seeking to protect market share. This was especially true in Asia, which buys about two-thirds of Saudi oil, and where the kingdom faces increasing competition from Iraq, Iran and other producers.
The increase in the OSP doesn’t necessarily signal that the Saudis are now more keen to shore up prices at the expense of sales volume. Rather, it’s more likely that the Saudis are comfortable with the amount of oil they are selling to Asian refiners.
Take the recent data from China, which showed imports from Saudi Arabia at 4.736 million tonnes in September, sharply up from August’s 3.944 million tonnes.
It was the highest level of imports from Saudi since January and also meant that Saudi supplies exceeded the 4.48 million tonnes from Iran and Iraq combined, a reversal from August when the imports from the two countries were slightly higher than those from Saudi Arabia.
It’s important to note that the Chinese data for September doesn’t show what will happen in December, but it seems plausible that the Saudis are now comfortable with the sales volumes in Asia, and this helps explain the rise in the OSP.
Thomson Reuters Oil Analytics research has pegged preliminary shipments into China from Saudi Arabia for October at 4.85 million tonnes, which would be higher than September’s outcome, and once again beat the combined total of Iran and Iraq.
The Saudi decision to raise its OSP for Asia for December is most likely a combination of a rise in Brent’s premium over Oman/Dubai and a winding back of some of the prior month’s exceptional discount amid comfort about sales volumes and prices.