Aramco raises Asia oil pricing to four-year highs on demand

Anthony DiPaola June 06, 2018

DUBAI (Bloomberg) -- Saudi Arabia, the world’s largest oil exporter, raised pricing on key crude grades for buyers in Asia to the highest since 2014 as demand builds in the country’s biggest market amid threats to rival suppliers.

State-owned Saudi Arabian Oil Co. raised its official selling price for Arab Light crude for July shipment to Asia by 20 cents to $2.10/bbl more than the Middle East benchmark, the company said Tuesday in an emailed statement. The company’s third consecutive increase in the grade brings it to the highest since July 2014. The producer, known as Saudi Aramco, increased the premium by less than the $0.34 rise expected by six traders in a Bloomberg survey.

Aramco’s Extra Light and Medium grades will also sell to Asia at the widest premiums since 2014, while Heavy crude is at the highest level since 2012, according to data compiled by Bloomberg.

The company is raising pricing to Asia as competing bbl from fellow OPEC producers Venezuela and Iran have dwindled from that market or are expected to become more scarce in coming months. Venezuela’s oil production dropped about 1 MMbpd compared with 2015 amid political and financial turmoil, while U.S. sanctions on Iran threaten to wipe out exports of the same amount.

Position of Strength

“The higher prices show the Saudis may feel that they are in a position of strength in selling to Asia -- because there will be less Venezuelan or Iranian crude, the Saudis see enough demand for their oil,” said Olivier Jakob, managing director of consultant Petromatrix in Zug, Switzerland.

Saudi Arabia’s pricing announcement for its monthly crude exports gives the first indication of how Gulf producers see markets. By setting its official selling prices, or OSPs, either higher or lower from month to month, the country signals how strong or weak it views demand globally. Other Middle Eastern producers use the Saudi numbers as a benchmark for their own OSPs.

Aramco raised pricing for all grades to Northwest Europe and the Mediterranean region and for most crudes to the U.S., where only Extra Light was left unchanged.

In the Northern Hemisphere, crude demand rises in the summer as U.S. refiners ramp up supply for the country’s driving season and producers elsewhere make fuels with different specifications for the warmer months. Saudi Arabia’s crude use can double as oil helps run air conditioners in the desert kingdom.

China Dispute

In Asia, Aramco has been involved in a months-long spat with a major Chinese buyer over the cost of its bbl. Sinopec, one of the world’s biggest refiners, cut purchases of Saudi crude in May and June, saying the price was too high. Sinopec, known officially as China Petroleum & Chemical, buys its crude through trading arm Unipec, or China International United Petroleum & Chemicals.

Oil prices have advanced since OPEC allied producers began cutting output in January 2017 to drain a global glut. After Brent crude reached $80/bbl last month, Saudi Arabia and Russia suggested raising production this year to limit the impact of higher prices on consumers and protect demand.

Brent gained as much as 1.2% on Wednesday after an industry report showed a drop in American crude stockpiles. The international benchmark, which has gained 13% this year, traded $0.55 higher at $75.93/bbl in London.

Middle Eastern producers compete with cargoes from Latin America, North Africa, Russia and increasingly the U.S. for buyers in Asia. Companies in the Persian Gulf region sell mostly under long-term contracts to refiners. Most of the Gulf’s state oil producers price their crude at a premium or discount to a benchmark. For Asia, the benchmark is the average of Oman and Dubai oil grades.

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