Saudi Arabia crude oil price cut for Asia shows demand concerns

LAUNCESTON: Saudi Arabia cut the price of crude oil for October delivery to its customers in Asia by more than the market expected, a sign that demand in the world's top-importing region remains tepid.

Saudi Aramco, the state-controlled oil giant, said in a statement on Sept. 5 that the official selling price (OSP) for its benchmark Arab Light crude for delivery to Asia would be lowered by $1.30 a barrel to a premium of $1.70 a barrel over the average of Oman and Dubai crude prices.

This was a much deeper price cut than the market expected, with a Reuters survey of refiners in Asia prior to the announcement forecasting a reduction of just 20-40 US cents a barrel in the OSP for Arab Light.

The larger-than-expected cut for Asia wasn't extended to other regions, with the world's largest crude exporter keeping OSPs for northwest Europe and the United States unchanged from September.

The reduction in Aramco's crude prices for its customers in Asia, which take about two-thirds of the kingdom's exports, is likely driven by several factors, including the weak recovery in the region's oil demand, the easing of OPEC+ output restrictions and a Saudi desire to regain market share.

Asia's crude demand recovered a little in August, with Refinitiv Oil Research estimating crude imports by the region at 23.24 million barrels per day (bpd), up from 22.61 million bpd in July.

However, it's worth noting that even the increase in August leaves Asia's crude imports well below levels that prevailed earlier this year, with the first four months of the year all being above 24 million bpd, and February topping 25 million bpd.

The modest gain in August imports was driven by India, Japan and South Korea, the region's biggest crude buyers behind China.

India's imports rose to 3.85 million bpd in August from July's 3.55 million bpd, while Japan's jumped to 2.63 million bpd from 2.08 million bpd, and South Korea's rose to 2.64 million bpd from 2.52 million bpd in July.

China was the weak spot, with August purchases dropping to 9.51 million bpd from 9.75 million bpd in July, as the world's biggest crude importer continued to use up stockpiles acquired cheaply during last year's price crash, and independent refiners kept out of the market amid import quota restrictions.

SAUDI BALANCING ACT

It's likely that China's crude imports will recover in coming months, partly as a result of excess inventories being drawn down, but also cheaper crude and increased supply from OPEC+ will tempt the return of buyers.

The OPEC+ group of exporters, which counts Saudi Arabia and Russia as its biggest producers, has agreed to increase its output by 400,000 bpd from August to December, easing its restrictions that had taken some 7.7 million bpd from global supply.

With higher output in coming months, it's likely that Aramco will be trying to encourage crude buyers in Asia to buy oil under term contracts, rather than go to the spot market in search of cheaper deals.

In recent months it has been cheaper for Asian refiners to buy spot cargoes from Russia and West African producers such as Angola and Nigeria than it has been to take term cargoes from Middle Eastern producers.

China imported 1.7 million bpd from Saudi Arabia in August, up from 1.58 million bpd in July, according to Refinitiv. But it's worth noting that this is still well below levels above 2 million bpd that prevailed prior to the coronavirus pandemic hitting first China and then the global economy early in 2020.

It's likely that Aramco wants to see China and other customers in Asia return to taking full term volumes, and a lower OSP will help in that regard.

The Saudis are also likely taking the view that Asia's oil demand will start to recover toward the end of this year, but this will depend on the trajectory of the current coronavirus outbreaks in many of the region's countries, and how quickly economies fully reopen.