Asian crude buyers expect sharp cuts to Middle East crude OSPs as Saudi-led price war wages on

Singapore — The price war instigated by Saudi Aramco's dramatic official selling price cuts last month could continue as producers prepare to issue a fresh set of OSPs for May loading barrels this month, continuing a race to the bottom for global oil prices that have already touched multi-year lows.

Market participants told S&P Global Platts monthly OSP expectations survey that Saudi Aramco could cut price differentials for its crude grades flowing east by $2-$3/b this month based on plunging demand and the sharp drop in underlying reference markers for Middle East crudes in Asia.

Survey results showed expectations are for Saudi Arab Light to be cut in a range of $1.50-$4/b for May loading cargoes headed to Asia. The wide range of price cut estimates reflected the high degree of uncertainty in the current market, traders said.

"Considering the economics of other arbitrage cargoes, Arab Light should be cut by $3/b, but it all depends on Saudi Arabia's intentions," one survey participant said.

Arab Medium is expected to be cut by $1.50-$2/b, survey results showed.

"We are expecting the OSPs to go down at least $4/b all around," a China-based crude buyer said, citing competing arbitrage grades and expensive freight as the rationale for this estimate.

"China may have some demand, but why would they lift [volumes from term contracts] while the spot market is still expected to trade at discounts?" the buyer added.

DEPARTING FROM CONVENTION

Meanwhile, official selling differentials for ADNOC's grades for May loading could be cut by around $2-$3/b, traders said. ADNOC, which typically issues retrospective prices after the month of loading, departed from conventional methodology due to "unprecedented market conditions" last month. The company issued forward-looking price differentials for the first time, with price cuts matching or exceeding those by other Middle East producers, in a bid to remain competitive.

Several survey participants voiced concern about whether Middle East producers would stick to conventional methodology in setting prices this month, fearing the continuing demand destruction could spur unprecedented moves to retain market share.

"I wonder if they will follow the structure," a refinery-linked source in Asia said.

Saudi Aramco and other Middle East producers are understood to set their OSPs in line with the monthly change in the Dubai cash/futures spread. This key market indicator for spot market sentiment for Middle East crude fell more than $3/b month on month to average minus $3.11/b in March, Platts data showed.

LIGHTS UNDER PRESSURE

Lighter grades of Middle East crude are expected to see even deeper cuts in OSP differentials, survey participants said.

This could see premiums for grades such as Murban flip into discount against medium and heavier grades like Upper Zakum, a senior crude trader in Singapore said, adding: "It's a margin and demand problem."

Demand for these grades is particularly vulnerable as buying appetite for jet, gasoline and other transport fuels has run down, with product margins and subsequently prices for crudes with high yields of these products dropping sharply in March.

"Everyone's models [for crude valuations] are flipped at the moment - no API models are working correctly for this situation," one seller said.

Spot market price differentials for Abu Dhabi's Murban crude, tracked closely by Asian crude traders for cues on light sour crude sentiment, are now valued lower than medium sour crude, the seller added.

Several cargoes of light crude grades such as Das Blend and Qatar Land traded at deep discounts in the May trading cycle last month, at times dipping below incumbent values of medium and heavy crude grades.