Asian crude traders hopeful of price cuts to Saudi Aramco's March cargoes

Singapore — Refiners and customers of Saudi Arabian crude oil in Asia are hopeful the producer will slash official selling prices in lieu of softer demand for Middle East crude oil from the region seen over the past month.

Market participants surveyed as part of S&P Global Platts' monthly OSP expectation survey expect the producer to cut the price differential of its Arab Light crude headed to Asia by around 50 cents/b month on month. They pointed to a weaker market structure over January -- when trading for March-loading cargoes was underway in the spot market -- as a strong indication of falling demand, adding that this should be Aramco's main consideration when issuing prices to Asian customers over the next few days.

"OSPs for Saudi should definitely be cut, market is weak and structure and cracks are off so no big reason for prices to remain supported," said a trader with a North Asian refiner who was one of the survey respondents.

The March Dubai cash/futures spread (M1/M3 structure) averaged $2.12/b over January 1-30, a fall of 55 cents/b from $2.67/b averaged over December. The spread is tracked closely by the Asia crude market as a proxy of demand sentiment for Middle East crude for the region, and typically sets the general tone for OSP cuts or hikes each month.

BIGGER CUTS FOR LIGHTS

Among the kingdom's five grades that flow to Asia, survey participants expect lighter crudes to receive a bigger proportion of cuts. They attributed this to worsening refining margins for products on the lighter end of the crude barrel.

The spread between March FOB Singapore naphtha and Dubai futures ticked down $1.35/b from December to a discount of $5.14/b over January, Platts data showed. Product margins for gasoline, jet and gasoil were also lower month on month. The 92 RON gasoline/Dubai spread ticked down 49 cents/b to $6.63/b in January, while jet fell $2.62/b to $12.81/b and gasoil was down $2.20/b to $13.60/b.

On the flipside, refining margins for high sulfur fuel oil improved month on month due to inequilibrium between demand and supply for the grades in a post-IMO 2020 era. Supplies of high sulfur fuel oil shrunk in anticipation of the new low sulfur marine fuel regulations but demand has been slower to fade away, providing support to prices.

Subsequently, survey participants said fuel oil-rich grades such as Arab Medium and Arab Heavy could see softer price cuts, depending on how much consideration Aramco would give to higher fuel oil margins compared with weaker backwardation in the Middle East crude structure.

The March 380 CST Singapore fuel oil swap spread to Dubai futures averaged minus $15.40/b over January, up $6.51/b from December.

OSP METHODOLOGY

Saudi Aramco, along with most other Middle East producers of crude oil, will issue official selling prices for their crude cargoes scheduled to load over March in the coming days. It will also confirm monthly allocations of contractual volumes to the same customers for their March cargoes, once the OSPs are issued. Saudi Arabia's OSP-linked grades do not trade in the spot market.

The formula for its Asian OSPs is based on the average of Platts front-month cash Dubai and DME Oman. The state-run producer is understood to track the spread between Platts front-month cash Dubai and second-month futures in setting the core direction of the five crude grades destined eastward.

However, Aramco may also take into account other factors, such as product cracks.

The spread between Dubai cash and swap averaged $2.12/b in January, down 55 cents/b from $2.67/b in December, Platts data showed.

The spread between March Oman futures traded on the Dubai Mercantile Exchange and Platts Dubai futures averaged $2.80/b in January, down 52 cents/b from December.

Platts surveys a range of crude oil market participants across Asia for OSP expectations each month, comprising sellers, refiners and traders of Middle East crude oil in the region.