Saudi Aramco to weigh supply cuts against term prices going in to OPEC+ meeting

Singapore — Crude oil produced by OPEC kingpin Saudi Arabia and sold to Asia is due for a heavy price correction this month, but that could be tempered by larger-than-expected production cuts as a potential outcome of the OPEC+ meeting this week.

With Asia plagued by the rapid spread of the coronavirus in the first two months of the year, demand for crude oil -- much of which is exported to arrive from the Middle East -- fell to abysmal levels as economic activity and product margins declined rapidly.

The Dubai M1/M3 spread, one key market indicator for spot market sentiment of Middle East crude, fell more than $2/b between January and February. The spread also flipped from long-standing backwardation into contango within the same period.

A hefty chunk of Middle East crude oil that is exported to Asian refineries is priced against Dubai crude, with the M1/M3 spread forming a key component of price setting by producers such as Aramco.

The spread averaged $2.11/b over January, already down 56 cents/b from the December figure. But by the time trading wrapped up for April barrels in February, the spread had flipped into contango, underscoring bleak demand in the region.

The February Dubai M1/M3 spread averaged minus 2 cents/b, the first monthly average in negative figures since March 2018, according to Platts data. The average for March 2018 had been minus 30 cents/b.

Reluctance toward downside

Market participants surveyed as part of S&P Global Platts monthly OSP expectation survey said the producer ought to cut price differentials of its crude grades flowing east by $1/b to $2/b this month.

But survey participants also noted that producers could be reluctant to cut official selling price (OSP) differentials in large chunks due to weaker performance by global oil markets, which could erode their revenues.

"Revising downwards is always harder than revising upwards," said a refinery-linked source.

Middle East producers flying in to Vienna this week could use a fresh production cut as justification for fewer price reductions to term customers, market participants based in Asia said.

"I think a correction of $1-1.50/b is fair, [but] they might not [do it]," a crude trader based in Singapore said. "It depends on production cuts."

Survey responses for Saudi Aramco's Asia-destined crudes covered a wide range of estimates. Responses for Arab Light ranged from a price hike of 90 cents/b to a cut of around $2/b for April-loading barrels. Additionally, survey respondents projected cuts ranging from 25 cents/b to $2/b for Arab Medium, and cuts ranging from $1.35/b to $2.10/b for Arab Heavy.

1 million b/d supply cuts

OPEC ministers are meeting Thursday and Friday in Vienna to debate production policy with Russia and nine other allies. Saudi Arabia has for weeks urged fellow members to embrace deeper output cuts, with 600,000 b/d as the purported figure up for discussion.

But fresh reports emerged earlier this week, touting 1 million b/d as a possible target for the alliance.

Lukoil vice president Leonid Fedun said late Monday that he expects OPEC+ to agree to further output cuts, which could be more than 1 million b/d, with Russia agreeing to cut 200,000-300,000 b/d of production, the Prime news agency reported.

Russian energy minister Alexander Novak said he had not received proposals on increasing the OPEC+ crude production cut by 1 million b/d, Prime news agency also reported.

A consensus around any sort for a cut agreement has been elusive so far, and all decisions must be approved unanimously.