Asian refiners may be about to get a welcome boost from major oil producer Saudi Arabia, which is likely to keep lowering the cost of crude to the region. Saudi Aramco, the kingdom’s state oil producer, looks set to again cut the official selling prices (OSPs) for November cargoes when details are published shortly.
There are several reasons this may be the case, but chief among them is probably concern over market share in Asia. It appears that Saudi Aramco has decided to make Asian markets its main focus, which makes sense given that the region takes about two-thirds of the producer’s output.
The Saudis aren’t exactly retreating from the North American and European markets, but they seem to have read in the tea leaves the trend that physical oil flows are moving towards the East and away from the West.
This pivot from North America can be seen in the OSPs this year for the various regions, with prices rising for cargoes to the US and dropping for Asia. In January this year, for instance, the OSP for benchmark Saudi Arab Light crude to the US was a premium of $1.65 a barrel to the Argus Sour Crude Index. By October, the premium for the US had risen to $2.45 a barrel.
For Asia, in contrast, the premium for Arab Light over Oman/Dubai was $3.75 a barrel in January, but this had dropped to a discount of 5 cents a barrel by October, the first time it has been a discount in four years.
The collapse in the spread has resulted in Saudi Aramco lowering the OSP for its benchmark grade in order to keep its crude competitive with grades priced against Brent. The ongoing weakness in the spread means the OSP is poised to continue at low levels, but the other factor driving reduction is Saudi concern over market share.
China, Asia’s biggest crude importer and the Saudi’s top customer, has been taking more cargoes from Iran and Iraq recently, and trimming its reliance on Saudi Aramco. The Saudis are likely to be uncomfortable with this situation, and they may plan to keep their crude competitive with those from their rival Middle East producers.
While the Saudis will understand that a major buyer such as China will desire to have a range of suppliers, they will also want to make sure they aren’t giving up market share. But still Chinese imports of Saudi crude have trended lower since peaking in early 2012.
If the Saudis have shifted their focus to Asia, and if they are determined to keep, and even build, market share, then its likely they will be prepared to accept lower prices. By keeping their OSPs at low levels, the Saudis may well be signalling to Asian refiners that it’s “game on” against their Middle East rivals.
