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Saudi OSP cuts a precursor for other Middle East producers to slash prices

Singapore — Saudi Aramco's decision to cut the official selling prices of its May-loading crude to Asian customers will pave the way for other Middle East producers to follow suit, continuing a tussle for market share initiated by Aramco in March, trade sources said Tuesday.

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Aramco on Monday slashed its Asia-bound May OSPs by $2.95/b-$5.50/b from the prior month's OSPs -- exceeding market's expectations of $2-$3/b cuts as per a survey published by S&P Global Platts earlier this month.

The cuts were made despite Saudi and OPEC+ members' agreement to cut production by 9.7 million b/d cut for May and June 2020, with lesser cuts for the remainder of the year.

"The OPEC output cut deal [can be considered] historic, but look at the steep price cuts [from Aramco]," a trading manager at South Korea's GS Caltex in Seoul said.

Acutely weak crude oil demand from major Asian importers will pitch competing Middle East crude grades against each other for best value in refinery valuations, traders indicated.

"Saudi had to cut prices despite the OPEC+ production cuts, in order to stay competitive," a senior crude trader in Singapore said.

"The [production] cuts are for 10 million b/d, but demand has declined [by] some 30 million b/d over these months so there is still competition to get to the customer," he added.

The OPEC leader's move on Monday has set the stage for widespread price cuts from other major crude exporters like the UAE, Kuwait, Iraq and Qatar, traders said.

"Other producers have no choice, but to follow Saudi's price cuts," the senior trader said, adding that low demand will still dictate market sentiment in April as it had in March.

Producers that poll Asian term lifters for their input on OSPs were also likely to receive recommendations for strong price cuts in line with those by Aramco.

"What can we recommend except follow the Saudis," a China-based source said.


Despite Aramco's bigger-than-expected cuts, the cut in Arab Light OSP differentials were reflective of the negative gasoline and jet fuel crack spreads, a Japanese refiner said.

Second month FOB Singapore 92 RON gasoline swap crack versus Dubai swap averaged minus $1.17/b in March, a sharp dip from the plus $7.48/b averaged in February, Platts data showed, while second month Singapore jet fuel crack swap against Dubai swaps averaged at a 17-year low of $4.89/b in March, and has slipped into negative territory for the first time ever in April.

Aramco, which slashed the price of its Arab Extra Light to the same level as that of its lower value Arab Medium and Heavy crudes, has also set the precedent for other producers to crunch the premiums commanded by lighter grades, such as Abu Dhabi's Murban or Qatar's Land crudes, market sources said.

"Quality spreads have crunched, and Murban's [premium over medium grade] Upper Zakum is very likely to also be flat or around there," the first trader added.

"Murban will likely be set similar to Saudi cuts [for Arab Extra Light], it cannot afford to be more expensive than AXL," the trader said.

Murban is Abu Dhabi's largest crude grade by production and is considered a premium grade for Asian refiners due to its high yield of naphtha and distillates.

The grade is considered an unofficial reference for other light Middle East crude grades traded in the Asian spot market.

But typically light sour crude premiums have been eroded as demand for transport fuels has plunged in recent months.


Buyers, meanwhile, were in no rush to begin procurement for the current cycle, and were waiting for other producers to release their respective prices in order to gauge the best value among Middle East crude grades. they also expect near term demand destruction to peak at around 20 million b/d.

"[We are] not in a hurry to buy, I am sure other producers will cut prices too," a Singapore-based crude oil trader with a state-owned Chinese company said.

Market participants also noted the unsold April and May loading crude barrels available to Asian refiners.

"Demand itself is not better, and there is lots of excess standing by if someone does show demand," the first trader said.

The Dubai crude structure, tracked by market participants as a gauge of spot market sentiment for Middle East sour crude in Asia, has fallen further this month, averaging minus $9.15/b to-date in April, down from minus $3.11/b over March, Platts data showed on Tuesday.

"Dubai structure is at a record low, the Asian product cracks too, gasoline is also [at a] record low, I think. Asian demand, that's what matters the most for the producers," the Seoul-based trading source added.

Saudi Arabia crude OSPs