LAUNCESTON: It’s always tempting to try and over-analyse changes in the crude oil market and Saudi Arabia’s decision to cut its official prices for Asian customers to the lowest level in four years is one such example.
Saudi Aramco, the state-controlled oil company of the world’s largest oil exporter, said on Sunday it is lowering the official selling prices (OSPs) for refiners in Asia, which buy about 70% of the kingdom’s crude.
The OSP for the benchmark Arab Light grade for January-loading cargoes was lowered to a premium of 90 cents a barrel over the Oman/Dubai average, down 80 cents from a premium of $1.70 for December.
This is the lowest premium for Arab Light since January 2021, at a time when global demand was weak as a result of the COVID-19 pandemic.
The lowering of Saudi OSPs is often viewed by market analysts as a sign of two things, namely weak demand and an attempt to regain market share from competitors.
There is certainly a case to be made for both of these factors.
There is little doubt that demand in Asia has been disappointing in 2024, with it all but certain that the continent’s imports will decline this year from 2023.
For the first 11 months of 2024 Asia’s imports were 26.58 million barrels per day (bpd), according to data compiled by LSEG Oil Research.
This is down 310,000 bpd from the 26.89 million bpd for the first 11 months in 2023.
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However, there are some signs that demand has picked up, with LSEG data showing November imports at 27.05 million bpd, the highest in six months and up almost 1.0 million bpd from October’s 26.06 million bpd.
The gain was led by China, with LSEG showing the world’s biggest oil importer saw arrivals of 11.77 million bpd in November, up from 10.57 million bpd in October.
It could be argued that the Saudi decision to cut OSPs for January is to try and ensure that this nascent recovery in demand continues.
The lower OSPs may also reflect that the US dollar has strengthened in recent weeks, meaning that lower oil prices in dollars aren’t fully reflected in local currencies in key Asian buyers.
Since the recent peak in Brent futures of $81.16 a barrel on Oct. 7, the price in US dollars has declined 12.4% to end at $71.12 on Dec. 6.
However, in Chinese yuan terms it is only down 9.7% over the same period and in Indian rupees by 11.6%.
Market share
The view that Aramco is trying to regain market share by lowering OSPs is also popular, but not necessarily one that stands up to scrutiny.
Saudi Arabia is the biggest supplier to Asia and has seen its market share recover in recent months.
From a low of 16.7% of Asia’s imports in August, Saudi Arabia’s share has risen to 20.8% in September, 18.3% in October and 21.0% in November.
Russia, the second biggest supplier to Asia, has seen its market share go from a 2024 high of 15.8% in June to 14.5% in September, 15.7% in October and just 12.9% in November, according to LSEG data.
Perhaps the biggest factor driving Aramco’s decision to lower its OSP is the need to keep its oil at competitive levels versus competing grades.
This isn’t an issue for the bulk of Middle Eastern crude, which tends to price off movements in Aramco’s OSPs.
But it is more of a factor for crudes that price against Brent, such as those from West Africa.
The premium that Brent commands over Middle East benchmark Dubai has been narrowing in recent months, meaning Brent is becoming cheaper on a relative basis.
The premium dropped to $1.08 a barrel on Dec. 6, the lowest since Sept. 30 and down from a recent peak of $2.39 on Oct. 4.
By lowering its OSPs for Asia, Aramco keeps its crude pricing more competitive with grades from exporters such as Angola and Nigeria.
The views expressed here are those of the author, a columnist for Reuters.
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