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SINGAPORE: Top oil exporter Saudi Arabia is expected to cut prices for light crude grades it sells to Asia in December to track falling Middle East oil benchmarks and lower margins for gasoline and naphtha, trade sources said on Thursday.

The producer may cut the official selling price (OSP) for flagship Arab Light crude in December by 20 cents to 50 cents a barrel, after the OSP hit a three-month high in the previous month, a Reuters survey of five refiners showed.

The depth of the price cut would depend on how much state oil giant Saudi Aramco takes into account the changes in the market structure for oil pricing benchmarks Dubai crude published by S&P Global Platts and Oman crude on the Dubai Mercantile Exchange (DME). Aramco switched to a new price reference that takes the average of the two price markers from October.

The backwardation, or the market structure when prompt prices are higher than later-dated prices, between the first-month and third-month Platts Dubai prices narrowed by about 20 cents during October while the backwardation for DME Oman narrowed by about 50 cents, one of the respondents said. This averages to about 35 cents to 40 cents, he added.

A narrowing in the backwardation suggests that prompt demand for oil is falling.

The OSPs for Saudi light grades are under further downward pressure from weak naphtha and gasoline margins that have buckled under high supplies as refiners maintained full output to capitalise on gains in middle distillate margins.

"The naphtha and gasoline cracks are really weak so there should be a bigger cut for lighter cargoes, the respondent said.

The price cut for Arab Extra Light could be as deep as $1 a barrel, the sources said.

In contrast, fuel oil margins are near all-time highs, lending support to Arab Heavy, they said.

All except one respondent expect Arab Heavy crude's OSP to rise for December.

Saudi crude OSPs are usually released around the fifth day of the month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting more than 12 million barrels per day (bpd) of crude bound for Asia.

Saudi Aramco sets its crude prices based on recommendations from customers and after calculating the change in the value of its oil over the past month, based on yields and product prices.

Saudi Aramco officials as a matter of policy do not comment on the kingdom's monthly OSPs.

Copyright Reuters, 2018