Thursday, 06 December 2012 10:29
LAUNCESTON: Saudi Arabia is asking refiners in Asia to pay more for their January-loading crude, both in absolute terms and also relative to their counterparts in Northwest Europe.
While this may seem unfair to Asian processors, the increase in official selling prices (OSP) by Saudi Aramco is also a sign of the relative health of the region compared to Europe.
But the Saudis are now risking shrinking refinery profits in Asia by too much, as happened earlier this year, increasing the likelihood that the OSP premium will be lowered early in 2013.
The state-owned company that is the world's biggest crude exporter raised the OSP for January for its benchmark Arab Light grade to Asia by 35 cents a barrel to a premium of $3.30 over Oman/Dubai.
This was the fifth consecutive increase in the OSP to Asia, and reflects the strength in the region's refining margins and the relatively strong backwardation in Dubai crude.
It's also the highest premium to Oman/Dubai since the $4.15 a barrel in January, a level at which Asian refiners expressed discomfort and one that was subsequently wound back rapidly, with the premium dropping to $1.15 a barrel by June.
In contrast to Asia's higher oil costs, the discount to refiners in Northwest Europe was widened to $1.20 a barrel from December's 20 cents over the Brent Weighted Average.
It's generally accepted that Saudi Aramco adjusts its OSPs to reflect moves in the underlying crude in order to maintain relative price stability for customers both in Europe and Asia.
However, it also appears that the company can adjust its OSPs when it wants to signal that it's keeping the market well-supplied.
This appears to have been the case in the second quarter of this year when the premiums to Asia narrowed and the discounts to Europe expanded, just as the market fretted over the potential impact of the loss of Iranian cargoes because of Western sanctions.
The January pricing may show that the Saudis are slightly more concerned about weak demand in Europe than in Asia.
Using the Brent Weighted Average price from Nov. 30 of $110.74 a barrel, around when the OSPs would have been calculated, and subtracting the $1.20 discount gives a price for Northwest European refiners of $109.64 a barrel.
Taking the Dubai swaps price at the same day of $107.02 and adding in the January premium of $3.30 a barrel to Asia, gives a price of $110.32.
This means in relative terms, Asian refiners are paying around 70 cents more a barrel that those in Northwest Europe. It's not a massive difference but one that does eat into refiners' profits in Asia.
Refiners are better off currently in Asia, with complex margins at $5.20 a barrel over Dubai, while in Europe, refiners in Rotterdam are making $4.57 a barrel over Brent.
The Asian average for the past year is $7.38 a barrel, while in Rotterdam it's $6.87, which also might explain the Saudi's slightly cheaper pricing to Europe.
However, it's also clear that the Saudi move to raise OSPs to Asia since September has eroded margins for the region's refiners.
In August, the complex margin averaged $10.39 a barrel, and has dropped as low as $4.77 in the past five days.
The lower refinery margins, if maintained, may be enough to cause the Saudis to reverse course for cargoes loading in February, especially since peak winter demand will have passed.
Copyright Reuters, 2012