SINGAPORE: Saudi Arabia’s decision to sharply hike its term prices for heavy crude oil shipments has raised eyebrows among Asia’s refiners, amid uncertainty over how long margins on fuel oil will stay strong.
The price markups to seven-month highs also come ahead of a closely watched meeting of the Organisation of Petroleum Exporting Countries, where Saudi Arabia is expected to come under pressure from some other members to slow its sales.
Its latest term crude prices suggest state-owned Saudi Arabian Oil Co (Saudi Aramco), may be starting to price in a period of lower output, even if Opec next week doesn’t formally sign off on a production cut.
Other Opec options could include a more informal agreement for a closer alignment with official quotas, or even a decision not to take any significant action at this stage.
Late on Wednesday, Saudi Aramco released its crude official selling prices for October, raising Arabian Medium and Arabian Heavy, two grades that make up the bulk of its supplies to Asia – the kingdom’s primary market – while marking down three lighter grades.
Arabian Medium, which is often used as a pricing reference by neighboring producers Iran and Kuwait, was hiked 70¢ on-month to a $2.25-a-barrel discount to the average of Oman and Dubai crude assessments for October.
Arabian Heavy was posted at $4.60 a barrel below the Oman-Dubai average, up $1.50 from the September OSP, Saudi Aramco said in a fax to Dow Jones Newswires.
“Heavies are too much,” said an official with a South Korean refinery that imports Saudi crude.
“Even though fuel oil is rallying back this month, it can still weaken.”
Crudes produced by Saudi Arabia, as well as most Middle East exporters, are primarily heavy by specific gravity and high in sulphur or “sour,” offering a sizable yield - often in excess of 50% - of fuel oil.
In recent months, the heavy product has turned bullish on tight supply around the world, outpacing so-called clean products such as distillate or gasoline, a trend unshaken by the fluctuations in outright oil prices.
In Asia, the high-sulphur fuel oil crack, a reference profit margin, has climbed sharply, spiking to about Dubai crude minus $2.50 a barrel this week from minus $30 a barrel at the start of July, traders said.
This has shored up buying interest in Middle East crude although, amid what some traders described as a sense of economic gloom and risk aversion, refiners aren’t sure if the fuel oil market rebound can be sustained.
Saudi Aramco also hiked its October OSPs for heavy-crude term supplies to Northwest Europe and the Mediterranean, although not for the U.S, where demand has weakened.
Officials at the company won’t comment on their pricing policies.
The Saudi OSPs may offer an insight into Opec’s policy thinking as the market turns its focus to a meeting scheduled next Tuesday in Vienna.
Opec’s 13 members haven’t gathered formally since March 5 and with benchmark oil prices falling steadily, consumer nations are bracing for a potential output response.
New York light sweet crude futures this week dipped more than 28% from the July 11 all-time high of $147.27 a barrel, fueling speculation that Opec, which pumps 40% of the world’s crude, may cut output to support prices.
On Thursday, the futures contract for October delivery was trading around $109 a barrel.
While recent chatter from several Opec member officials suggests output targets may be kept unchanged, calls are growing for Saudi Arabia to toe the official line on production, analysts said.
Over the summer, the kingdom unilaterally raised its exports in a bid to cool the price surge, and last month supplied an average 9.5mn bpd.
This is equivalent to 29.2% of Opec’s estimated total – and well above Saudi Arabia’s notional quota of 8.943mn bpd, according to a Dow Jones Newswires survey published on Tuesday.
The poll also showed Saudi Arabia, the world’s top oil exporter, probably already cut back by a modest 50,000 bpd from July.
“Quotas may be left unchanged, allowing Saudi to (continue to) make discretionary changes,” Harry Tchilinguirian, senior oil market analyst at BNP Paribas in London, said in a Wednesday note to clients.
“In the end, eventual changes to actual Opec output will primarily come from Saudi Arabia, which has accounted for the bulk of the cartel supply increase since the second quarter.” – Dow Jones Newswires
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