Deeper quality inversion on the cards for Asia's June crude OSPs: Platts survey

Official selling prices for Middle East crudes flowing to Asia in June are expected to see a third consecutive month of cuts amid bearish market indicators, with values for lighter grades shrinking further relative to heavier ones, results from S&P Global Platts' monthly OSP survey revealed this week.

Survey respondents in Asia were unanimous on the general direction for June OSPs, which includes prices issued by Saudi Arabia, UAE, Kuwait, Qatar, Iraq and Iran.

Market participants expect Aramco to cut prices of most of its crudes within a range of $1/b-$3/b, with similar declines expected across other producers, they told Platts.

If expectations convert into reality, this would be the third consecutive month of hefty price cuts from Middle East producers within the wider climate of hard-won OPEC+ production cuts and COVID-19 demand recession.

However, crude traders in Asia pointed out that price cuts might start to taper off this month, despite market structure continuing to post sharp declines over April.

"OSP is going to be tough to estimate this month, I doubt NOCs will reduce as much as the structure," said one Southeast Asian refiner, referring to the spread between Dubai cash and paper declining more than $6/b on month.

This was mainly attributed to producer strategy, with Middle East countries seemingly reluctant to erode oil revenues any more than absolutely necessary, said survey respondents.

"Saudi might lower their OSP if they still follow the [conventional] model of OSP calculation," said one participant.

"But there are OPEC cuts this month, not sure if Saudi will cut as much as in the] last two months," he added.

LIGHT/HEAVY QUALITY INVERSION

The survey also brought into focus the possibility that lighter crude grades, such as Aramco's Arab Extra Light or ADNOC's Murban, will see deeper cuts compared to medium and heavy crudes.

The latest OSPs "should be down again, but mid-heavy [grades] will [fare] better than light crudes," said a China-based market source.

Last month, ADNOC set the price of flagship Murban crude at a discount to medium, sour Upper Zakum for the first time ever, while Aramco slashed the price of its Arab Extra Light to the same level as that of its lower value Arab Medium and Heavy crudes.

These quality inversions could deepen further this month, due to several reasons, market participants said.

Worsening product margins for naphtha, gasoline and jet fuel dictated bleaker prices for light grades with rich yields in these products.

Some survey respondents also pointed to a chance that some medium and heavy grades might be hiked in line with spot market performance over April. For instance, Abu Dhabi's Upper Zakum could be raised by up to 15 cents/b, said one respondent, while another said Arab Heavy, Basrah Heavy etc, could be hiked.

"ADNOC grades might be hiked because of [production] cuts," said a Singapore based crude trader.

Additionally, medium and heavy grades are relatively in short supply compared to light crude availability globally, said traders.

For instance, three out of four of Abu Dhabi's crudes offered to Asian buyers are light grades. In recent volume cuts announced by ADNOC to comply with OPEC+, Murban is the only light grade out of the three to see cuts from 15%-20%, while Umm Lulu and Das Blend will get cut by 5% over May and June.

Meanwhile, ADNOC's only medium crude, Upper Zakum, will be cut by 15%-20%.

"Murban [OSP] will drop more, Upper Zakum may [fare] better," the China-based market source added.

OSP METHODOLOGY

Middle East crudes have departed from conventional price setting methodology in recent months amid a period of uncertainty and hotly contested market share by producers.

"I don't think OSPS are a straightforward easy call this month," added a fifth survey participant.

Previously, producers were understood to closely track monthly changes in Dubai and Oman spreads to define the core direction and extent of price hikes or cuts, but this does not seem to be the methodology of late, said survey respondents.

"For the past two months, they [producers] have not been setting their OSP in proportion to what's happening in the market," added a sixth respondent.

Additionally, a fight for market share amid rapidly shrinking demand has also forced producers to align price chronology, so that all Middle East OSPs are now issued against the same month of loading. This month, producers are expected to issue prices for cargoes loading from the Persian Gulf in June.

Producers may also take into account other factors, such as product cracks, spot trade levels, and now OPEC+ production cuts.

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.