Asian buyers likely to cut Saudi crude nominations after Aramco hike in July OSP differentials

Several Asian refiners, led by China, are widely expected to make voluntary cuts to their Saudi crude oil term nominations following Saudi Aramco's hike of 45 cents/b to the July official selling price differentials across all its grades to Asia, traders in Asia said June 6.

The July OSP differential of Aramco's key Arab Light grade bound for Asia is set at a premium of $3/b to the Oman/Dubai average, and at a premium of $2.55/b to the same basis for Arab Extra Light, according to a notice from the company June 5.

Traders were expecting a cut of at least 40-50 cents/b in the OSP differentials from June, in line with the fall in the July-loading sour crude complex through May.

However, Saudi Arabia had said over June 3-4 that it would cut its crude output by an extra 1 million b/d for at least July on top of its existing production cuts. This meant that Asian refiners braced for the possibility of Aramco keeping its OSP differentials relatively high for July.

"Saudi [is showing] strong intention to reduce exports," a Singapore-based trader said in reference to the OSP differentials, adding that he expected some voluntary cuts to be made by Asian buyers.

While trade sources expected more voluntary cuts from Asian refiners, all eyes were on Chinese state-owned term lifters, which were widely expected to lead the cuts and turn to the spot market to offset the shortfall.

But Japanese refiners may continue to nominate base term volumes, according to another Singapore-based trader.

In the last cycle for June, Chinese buyers had cut at least 5 million barrels of term nominations from May in reaction to refiners seeing Aramco's OSPs as being still too high. A majority of other Asian refiners, however, had nominated and received full base volumes for June.

"But even after last night's move, [the] spot market looks crazy cheap... and refiners will rush for it and nominate as little as possible," a third Singapore-based trade source said.

"The spot physical [market] in August will soar because July [would] end with no carry for replacement of Saudi [barrels]," the same source said, adding that Asia would probably continue pulling in arbitrage barrels to offset the cut in Saudi crude.

On the flip side, Aramco may cut allocations to Asian buyers in line with its deepening production cuts, according to trade sources.

Should allocations be cut, the grades impacted would be Arab Heavy and Arab Medium amid expectations of relatively low Arab Heavy supply, according to traders.

Aramco has set the July OSP differentials for its Arab Medium and Arab Heavy grades at premiums of $2.45/b and 80 cents/b to the Oman/Dubai average.

Saudi Arabia typically directs more of its medium and heavy grades for direct crude burning to meet summer power generation demand.

The kingdom is set to experience a quarter-on-quarter increase in demand of 770,000 b/d in the second quarter as demand for all fuels increases, S&P Global Commodity Insights reported earlier.

"Fuels utilized for electricity generation, such as fuel oil and diesel, are projected to account for half of the demand growth this quarter," according to the May oil market report released by Riyadh-based Kapsarc.

"With Q2 coinciding with the Hajj period, we are expecting Saudi Arabia to carry most of the non-OECD oil demand growth this quarter as they continue to use oil and its heavier fuels for electricity generation and cooling," the report said.

Saudi Arabia typically burns more crude during the summer, with this year's demand likely to be met with more Russian barrels as the kingdom continues to slash output.