Saudi crude OSP cuts lower than drop in Dubai structure, lift spot trade sentiment

Saudi Aramco cut February official selling prices for its Asia bound crude by a lower-than-expected level, potentially boosting demand for alternative crude oil grades in the spot market, sources told S&P Global Platts.

For Asia-bound crudes, Aramco dropped its Medium grade by $1/b to a $2.05/b premium over Oman/Dubai and its Heavy grade by $1.10/b to a 70 cents/b premium. Prices for its Super Light was trimmed by $1/b to a $5.15/b premium and Extra Light was down by $1.30/b at a $3.20/b premium. Arab Light was lowered by $1.10/b to a $2.20/b premium, the company said in a Jan. 6 letter.

"They cut but [OSPs] seems much stronger. I expected further cut," a trader with a North Asian refinery said.

Market participants had earlier told Platts that they expected Aramco to slash prices in a way that would reflect the fall in the Dubai structure last month.

The Dubai cash-futures spread, understood to be a key element in OSP calculations, averaged $1.52/b in December, dipping from an average of $3.38/b in November, Platts data showed.

Given the producers' penchant to surprise the market in setting its prices, a trend seen over the past few months, a drop in OSPs lower than the fall in Dubai structure was expected, some sources said.

However, with term barrels turning a shade too expensive, spot activity is likely to get a boost as trade for March-loading barrels nears commencement, a trader in Singapore said.

"February-loading Saudi crudes are expensive to same month spot cargoes. So they [buyers] don't want to increase term loading, [and are] coming to the spot market instead," the trader with the North Asian refinery said..

Though crude demand in Asia remains largely steady compared to the West, which is reeling under an onslaught of an omicron-driven infections, capped buying interest could limit trade activity in the East too, market sources said.

COVID-19 cases are on the rise in key economies such as India and China, while Chinese private refiners are also dealing with strapped crude import quotas, another trader with a North Asian refinery said.

In December, China issued crude import quotas to 36 qualified independent and non-major state-owned refineries in the first batch for 2022, a 9.4% drop from the same batch in 2021, Platts reported earlier.

"Omicron is a huge risk [with] some cities locked down. Maybe economies [will be] impacted and demand [also] will be impacted," the second trader with the North Asian refinery said.

Japanese demand is also likely to ease as spring refinery downtime approaches, which in turn could weaken the country's sentiment for lighter crude grades, market sources said.

Medium, light grades steady

Medium, sour and light sour crude grades could see stable demand in the spot market this month compared to heavy, sour crude grades, sources said.

"So far from what I heard, at least Japan and China demand is ok, so medium and light should be doing well," a trader in Singapore said.

Cracking margins for medium and light grades lend support to the price cuts while heavy grades are likely to see limited buying interest, the trader in Singapore said.

"Not focused much on heavy side... [trades for those grades are] less active," the trader in Singapore said.

Second month gasoil cracks average $13.50/b in January so far compared to $12.77/b in December, while FO 380CST cracks in January are down to an average of minus $7.45/b compared to minus $6.93/b last month, Platts data showed.

Aramco's price cuts, especially for lighter grades, is also likely to propel greater interest in Abu Dhabi's flagship Murban crude, traders said.

"AXL at $3.20/b makes the Murban look cheap," a third trader in Singapore said.

"After the OSP came out last evening, IFAD structure seems to have turned stronger," the first trader with the North Asian refinery said.

At the Asian close Jan. 6, March IFAD differential vs March Dubai futures was assessed at $3.33/b, up from $2.99/b at the Asian close on Jan. 3, Platts data showed.

Focus now shifts to the term allocations by Saudi Aramco, with buyers expected to avoid seeking incremental volumes despite more oil supplies being added to the market by the region's producers.

"Supply is very high [and] all producers want to sell their oil," the second trader with the North Asian refinery said.