Saudi's small crude price hike for Asia shows bigger concerns
Asia's beleaguered oil refiners have received welcome relief on two fronts as crude prices slide and top supplier Saudi Arabia offered some relief.
Saudi Aramco, the kingdom's state-controlled producer and the world's largest oil exporter, raised its official selling prices (OSPs) for September-loading cargoes for Asian customers by less than expected.
The benchmark Arab Light grade saw an increase of 20 cents a barrel ($0.20/bbl) to a premium of $2/bbl above the Oman/Dubai average, Aramco said in a statement on Monday.
While this was the first increase in the OSP in three months, it was less than half of the $0.50 hike expected by Asian refiners surveyed by Reuters ahead of the announcement.
While there is a risk in over-analyzing what is effectively a relatively small difference between the actual and expected OSPs, it's likely that the Saudis have concerns about the state of demand in the oil market.
By keeping OSPs at elevated levels at the start of the year, the Saudis have encouraged refiners in Asia, which buy about 70% of the kingdom's oil exports, to seek cheaper crude from alternative suppliers, such as the United States, Brazil and even Russia.
It appears that Saudi Arabia has been losing some market share in Asia, with LSEG Oil Research data showing the volume supplied to the region's refiners in July fell for a second month and was the lowest since April on a per day basis.
Asia imported 4.64 MMbpd from Saudi Arabia in July, down from 4.99 MMbpd in June and 5.68 MMbpd in May, LSEG data show.
China and India, the world's top two oil importers, show the problem the Saudis are encountering.
China imported 1.47 MMbpd from Saudi Arabia in July, down from 1.85 MMbpd in June, while imports from Russia were 1.81 MMbpd in July and 1.93 MMbpd in June.
Russia has overtaken Saudi Arabia as the top supplier to China, a reflection that Russian crude is being offered at a discount given the limited number of buyers since sanctions were imposed on Moscow in the wake of the invasion of Ukraine in 2022.
India's imports from Saudi Arabia were 530,000 bpd in July, which was up from 390,000 bpd in June.
However, India's imports from Saudi Arabia are now only about a quarter of those from Russia, with arrivals in July of 1.94 MMbpd and 2.13 MMbpd in June.
Prior to the Western sanctions on Russian crude, India was a minor buyer and the bulk of its oil came from nearby Middle East producers, led by Saudi Arabia.
Market share. It's likely that Aramco wants to stem some of the loss of market share in Asia, and by limiting the increase in its OSPs for September cargoes, it may be hoping to secure more volumes in long-term supply deals that are coming up for re-negotiation.
It's also likely that Aramco wants to provide some relief to refineries in Asia, which have been caught between relatively high crude prices but struggling product prices amid soft demand for refined fuels, especially the key industrial and heavy transport fuel diesel.
The profit margin for processing a barrel of Dubai crude at a typical Singapore refinery has recovered from its 12-month low of $0.90 on May 30, ending at $5.23 on Monday.
The recovery has largely come as oil prices have eased, with Brent crude futures dropping to $75.05/bbl on Monday, the lowest in 20 months, and down 15% over the past month.
Even though refining margins have improved as crude prices softened, the current level is still 47% below the peak so far in 2024 of $9.91/bbl, reached on Feb. 13, and only about one-third of the $15.40 refiners were enjoying in late August last year.
Weak refining margins tend to crimp demand for crude as refiners look to cut costs and trim processing rates.
However, the main issue for Saudi Arabia, and indeed its allies in the OPEC+ group of exporters, is the ongoing weakness in the crude price, which is a reflection of weak demand growth and mounting concern over recession in major economies, including the United States, the world's largest.
Asia's crude oil imports dropped to the lowest in two years in July as demand remained weak in top importer China and eased in number two India.
A total of 24.88 MMbpd arrived in July in Asia, down 6.1% from the previous month and the lowest on a daily basis since July 2022, according to LSEG data.
For the first seven months of the year, Asia's imports averaged 26.78 MMbpd, down 340,000 bpd from the same period in 2023.
This weak demand in Asia is something Aramco is recognizing with its lower-than-expected OSP increase for September. If there is a surprise, perhaps it's that the OSP was increased at all, rather than left unchanged, or even lowered.
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