Analysis: Asia finds Saudi crude much cheaper than Russian ESPO as Aramco launches price war

Singapore — The battle for Asian market share between major crude oil suppliers Saudi Arabia and Russia is set to heat up with the OPEC kingpin's move to slash its April official selling prices, luring Chinese and South Korean refiners to raise Saudi crude intake at the expense of Siberian oil imports.

The breakdown in OPEC+ negotiations for deeper production cuts in Vienna Friday with Russia refusing to go along with the deal, has set the stage for a potential price war among the major producer nations to secure their share of the Asian demand pie, which has already been rapidly shrinking amid the spread of the coronavirus disease.

"What's left in the [Asian] pie is still precious for the suppliers ... the breakdown in the negotiation would mean that each of the suppliers would fight for what they got and what they still can get," a Seoul-based Korea Petroleum Association official said.

Saudi Aramco made the first move Saturday to set a strong foothold in the Asian market for the upcoming trading cycles. The company slashed its official selling price differential for April-loading Arab Light crude bound for Asia by $6/b to minus $3.10/b against the average of Platts Dubai assessments and DME Oman futures.

It was the biggest month-on-month cut ever for the Arab Light OSP differential for Asia, according to S&P Global Platts data.

The latest OSP cuts signal a move of Saudi Arabia away for market price to market share at a time when the market is already reeling from severe demand destruction, according S&P Global Platts Analytics.

PRICE COMPETITION

Aramco's aggressive OSP cuts have turned many heads in the North Asian refining sector, with several Chinese and South Korean refiners highlighting the sharp discount for the Arab Extra Light and Arab Light grades versus one of Asia's favorites -- Far East Russian ESPO Blend crude.

April-loading ESPO Blend crude cargoes changed hands at an average premium of around $2.49/b to Dubai last month, according to Asian trade sources and Platts data.

This puts the spread between Arab Light or Arab Extra Light and the Far East Russian grade for cargoes loading in April at around minus $5.5/b, after taking into consideration the average difference between the two pricing benchmarks -- Platts Dubai versus Platts Dubai/DME Oman -- so far this year.

Over the past year, Arab Light and Arab Extra Light typically commanded a discount of $2-$4/b to the medium-light Russian grade on an FOB basis, though higher delivery costs due to the longer voyage for Middle Eastern cargoes bound for Asia would often erode such discounts, industry officials and refinery sources told Platts.

The sharper discount for the April Arab Light OSP against the ESPO spot price assessment for the same loading month could, however, provide an impetus for North Asian refiners to favor Saudi grades over Far East Russian oil.

"If the spread remains so wide, it's definitely worth considering seeking incremental Saudi light and medium barrels, while cutting down on Russian cargo purchases," said a feedstock procurement manager at Chinaoil in Beijing. Chinaoil is a trading arm of state-run refining giant PetroChina.

A Japanese refiner also said its linear programming model supports the idea of taking incremental Saudi barrels if Aramco OSPs remain competitive for May and beyond, a company source told Platts.

In South Korea, GS Caltex and SK Innovation said the price war between the two major suppliers bode well for Asian end-users, and the companies would take a flexible stance when it comes to crude feedstock trading economics.

"Refining margins are faltering, so it's in our best interest to take the most economical feedstock options available," a trading manager at GS Caltex in Seoul said.

Russian suppliers including Rosneft and Surgutneftegaz should slash offers for ESPO cargoes in the spot market to stay competitive in Asia, market participants said. The suppliers are expected to issue multiple spot tenders to sell ESPO cargoes for loading in May in the coming weeks.

"For ESPO, right now we have no [immediate] indication [for May-loading cargoes], but it is quite likely to see a $2-$4/b correction [in price differential] depending on how much the spot market goes down in line with the Saudi OSP cuts," said a trading manager at a Taiwanese refiner.

CHINA PIE

With the spread of the coronavirus in China showing some signs of easing, both Saudi Arabia and Russia will likely focus once again on the giant Asian consumer's demand recovery and their marketing strategies, industry sources and analysts said.

If outright oil prices stay below $40/b persistently, it may trigger China's product floor-price mechanism, incentivizing Chinese refineries to run harder to capture better margins domestically, according to Platts Analytics.

China has traditionally been the most heated battleground for both Saudi Arabia and Russia.

Russia was the winner in 2018 as China imported a total of 71.59 million mt from the non-OPEC producer last year, more than the 56.73 million mt it received from Saudi Arabia.

However, the Middle East producer overtook the pole position in 2019, with China receiving 83.32 million mt of Saudi crude last year, compared with 77.66 million mt from Russia, according to the data from General Administration of Customs.