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Saudi Aramco's January OSP jump to factor in OPEC+, omicron


Dubai structure rallies more than $1/b over Oct but demand cues soften

OPEC+ output hike, new COVID-19 variant, arbs could pressure sour complex

Lighter grades supported by better cracking margins

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  • Pankaj Rao
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  • Jonathan Fox
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Saudi Aramco and other Middle East producers are expected to raise official selling prices for crude loading in January on the back of a higher Dubai structure, but OPEC+ output and resurgent COVID-19 infections could lead to more moderate price increases on the back of cooling demand cues, traders told S&P Global Platts.

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Regional kingpin Saudi Aramco as well as other Middle East producers could raise prices by between 50 cents/b and $1.20/b across all Asia-bound grades, sources said.

The Dubai futures spread -- understood to be a key element in OSP calculations -- averaged $3.38/b in November, rallying from an average of $2.29/b in October, Platts data showed.

"OSP should go up at least -- it just depends on how much it will be discounted because of omicron," a trader in Singapore said, referring to concerns over weak demand for oil and products due to the emergence of a new COVID-19 variant.

Discovery of the new variant has stalled the increase in crude prices while the release of strategic petroleum reserves by the US and other economies such as India and Japan have put the spotlight on the next meeting of the OPEC+ alliance to discuss output, traders said.

The alliance is set to meet Dec. 2 to decide on January production levels amid a US-led attempt to lower prices by releasing stocks and fears over new lockdowns due to the new COVID-19 strain.

Refiners in Asia expect the alliance to stick to its current plans of raising production by 400,000 b/d each month despite an expected decline in crude buying appetite next month and growing uncertainty on the impact of the omicron variant, a trader with a refiner in Southeast Asia said.

At least two to three weeks are needed to be able to assess the impact of the omicron variant, with OPEC likely to keep to its strategy for the time being, the trader said.

Spot demand for February-loading crude from major Asian economies such as China and Japan could decline next month after the recent peak in imports seen for the winter, sources said.

"I don't think demand from Japan is strong next month as winter demand seems to already be diminishing," a trader with a North Asian refinery said.

Meanwhile, government scrutiny and emission curbs in China have left the country's private refiners grappling with lackluster buying appetite, traders said.

"On the crude end, teapots [private refiners] have tax issues [so] run rates should be low. SOE's [state owned enterprises] will have to produce to make up for the chunk that teapots can't do," another trader with a North Asian refinery said.

Adding further pressure to the Middle East crude complex is the availability of cheaper arbitrage barrels, including volumes of sour crude from the US SPR release that could make their way into Asia, various sources said.

"I think that OPEC will go easy on their OSPs, primarily because the [Exchange of Futures for Swaps] has corrected a long way," a trader said.

At the Asia close Nov. 30, the January Brent/Dubai EFS was pegged at $2.56/b, down from a high of $5.41/b on Nov. 2, Platts data showed.

The EFS is often tracked as an indicator of North Sea low sulfur crude value versus Middle East high sulfur crude, and a wider EFS makes crude priced against Dubai more economically attractive than Brent-linked ones.

Light, sour crudes could again outshine the medium, sour and heavy, sour grades, with higher increases of up to $1.20/b due to better crack margins, sources said.

"Refining margins for lights are still good, so the OSPs for lights will [be] raised [more]," another trader in Singapore said.

In November, cracking margins for naphtha averaged $3.78/b, up from $3.02/b in October, while gasoline cracks averaged $10.62/b in November, little changed from $10.94/b in October, data showed.

However, traders suggest a cautious increase in OSPs for lighter grades would help as refiners struggle with higher crude prices and uncertain demand following the emergence of the new COVID-19 variant.

"Max 50 cents/b increase [for lighter grades]. If it increased more, then there will be huge pressure on refineries," a third trader with a North Asian refinery said.

Differentials for ADNOC's grades Umm Lulu and Das Blend could see little change to the Murban OSP next month while its medium, sour grade Upper Zakum could see its differential widen slightly, traders said.