Sour crude demand to remain capped despite Saudi OSP cuts: sources

Singapore — The demand outlook for Middle East sour crude is likely to remain capped despite Saudi Aramco cutting the September official selling prices of its Asia-bound crude oil after three months of hikes, trade sources told S&P Global Platts on Aug. 7.

Saudi Aramco on Aug. 6 set the September Asia OSP for Arab Super Light and Arab Extra Light, at premiums of $2.05/b and 70 cents/b to the Dubai/Oman average, a drop of 60 cents/b and 50 cents/b, respectively, the company said in a notice.

The company dropped its Arab Light and Medium prices by 30 cents/b from August to a premium of 90 cents/b to the Dubai/Oman average. Arab Heavy OSP was set at 60 cents/b over Dubai/Oman average, a drop of 30 cents/b.

Market participants previously surveyed by Platts had expected both Aramco and ADNOC to lower their respective OSPs for crude loading in September by a range of between 30 cents/b to $1/b in view of the decline in structure seen in July.

While the OSP cuts made by Aramco were largely within expectation, sources said that the cuts were unlikely to uplift demand significantly.

"The cuts are not enough, even though I wasn't expecting declines of more than 50 cents/b to take place given that the [cash Dubai/futures] structure was not down a lot on average," a source from a northeast Asian refiner said.

The Dubai cash/futures (M1/M3) spread, a key indicator of spot market sentiment for sour crude in Asia, fell from an average of plus 84 cents/b for the whole of June to plus 71 cents/b for July.

However, within July itself, the Dubai M1/M3 spread dipped from a premium of $1.29/b at the start of the month on July 2 to minus 20 cents/b on July 28 -- the first time it had flipped into discounts in two months, Platts data showed.

WEAK REFINING MARGINS

Despite the lower OSPs, Asian refineries were unlikely to nominate full volumes in the current round of allocations, similar to the previous month, sources said.

"Prices are still way too high and spot cargoes will trade in deeper discounts... Buyers will not maximize their term [nominations] again," a crude oil source from a Chinese refiner said.

"Some US sellers who have pipeline commitments are trying to sell their barrels really cheap as well and the Chinese has already started buying a lot of US barrels, probably in anticipation of this OSP," the source added.

In addition, suppressed product margins could drive more Asian refineries to consider cutting run rates going ahead, in turn depressing demand further, sources said.

Product cracks for key transport fuels have weakened in recent weeks. The second-month 92 RON gasoline swap crack to Dubai swap had averaged $2.62/b in July, sliding from $3/b in June, Platts data showed.

Meanwhile, the second-month jet fuel swap crack to Dubai swap had averaged $2.47/b in July, down from $2.73/b in June.