FILE PHOTO: Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia, May 21, 2018. REUTERS/Ahmed Jadallah/File Photo
April 2, 2019
By Florence Tan
SINGAPORE (Reuters) – Top oil exporter Saudi Arabia is expected to keep prices of various grades of crude it sells to Asia little changed in May from the previous month, trade sources said on Tuesday.
State-owned Saudi Aramco may cut the official selling price (OSP) for its flagship Arab Light crude by 5 cents a barrel for May, according to the median of responses of five refining sources. The sources gave a range of an increase of 5 cents to a cut of 25 cents.
The respondents also expect similar price moves for the country’s other grades Arab Extra Light, Arab Medium and Arab Heavy.
The expectations for a slight decrease follows a marginal widening of the backwardation in the price structure for benchmark Dubai prices. Backwardation is when prompt prices are higher than later dated prices and it suggests that demand for a commodity is strong.
The difference between cash Dubai’s first and third month during March widened by 2 cents, the sources said.
However, during March, the profit margin for fuel oil, known as the crack spread, collapsed from a premium of $2.25 a barrel over Dubai crude to a discount of as low as 83 cents, reducing the value of Saudi Arabia’s heavy crudes.
“The price structure hasn’t changed much and fuel oil crack has worsened a bit,” said one respondent.
“Light crude supply is still long.”
However, a second respondent said the bigger-than-expected price hikes seen in April OSPs may signal a shift in Saudi’s pricing strategy that could point to higher prices if Saudi continues on the same track in May.
Saudi Arabia, which is cutting output to reduce global inventory levels to a target in line with the five-year average of supplies, stopped giving additional light crude supplies to some Asian refiners from March.
Saudi Arabia’s larger-than expected production cuts have reduced oil supply from the Organization of the Petroleum Exporting Countries to a four-year low in March.
State oil giant Saudi Aramco typically 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.
But April prices, announced last month, exceeded market expectations.Saudi crude OSPs are usually released around the fifth of each 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 officials as a matter of policy do not comment on the kingdom’s monthly OSPs.
(Reporting by Florence Tan; editing by Christian Schmollinger)