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Analysis: Saudi Aramco, ADNOC may lower Sep OSPs on bearish market, weaker structure: sources

Highlights

Average Dubai M1-M3 spread down 9 cents/b on month

Medium, heavy grades could fall more than lighter grades

Suppressed refining margins continue to weigh on outlook

Singapore — Middle Eastern crude oil producers Saudi Aramco and Abu Dhabi National Oil Company will likely lower their September official selling price differentials after three months of consecutive hikes, amid bearish market fundamentals and a weaker crude structure in recent days, market participants said.

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Both Aramco and ADNOC are expected to lower their OSP differentials of Asia-bound crude oil loading in September between 30 cents/b to $1/b, participants surveyed by S&P Global Platts said in the week ending July 30.

"Guessing that they will have to cut by at least 30 cents/b. Based on current economics, demand is not coming back soon unless OSPs go down next month," a Singapore-based crude oil trader said.

Earlier in July, Aramco raised the August OSPs for its crude supplies to Asia by $1/b for all grades. ADNOC, meanwhile, raised the August OSPs for its Murban and Upper Zakum crude oil by 75 cents/b and 95 cents/b respectively from July.

While the price increases for August were largely expected, buyers' appetite remained largely lackluster amid suppressed refinery margins. The easing of OPEC+ production cuts following a key monitoring committee review on July 15 and ample supply from storage also weighed on the sentiment.

Middle Eastern crude supply is expected to increase from August as the OPEC+ alliance will ease their production cut to 7.7 million b/d in August until the end of the year, from 9.7 milliom b/d in May, Platts earlier reported.

Reflecting this sentiment, the spread between benchmark front-month cash Dubai versus same-month Dubai futures, also known as the M1-M3 spread, plunged from a high of $1.29/b at the start of July to a two-month low of minus 20 cents/b on July 28, Platts data showed.

"All [grades expected to go] down a dollar for both Saudi and ADNOC OSPS," a source from a western oil major said, noting the current weakness in the market.

"The [OSPs for] medium-heavy grades like Upper Zakum are likely to go down more, the current OSP [for UZ] is too high and most product cracks are not showing much improvement from last month," a source from a Chinese trading house said.

CASH STRUCTURE FLIPS INTO DISCOUNT

The discounts seen for the M1-M3 spread in recent days had lowered the average of the key price indicator down to a premium of 75 cents/b in July so far, lower than an average of 84 cents/b premium for the whole of June, Platts data showed.

The M1-M3 spread is a key price indicator for Middle East sour crude market, tracked by the producers in the same region to define the core direction and extent of price hikes or cuts.

"The OSPs should drop in line with the formula or more. Plus if we look at the weakness for Oman market recently, there is room for medium-heavy grades to go even lower," a source from a Japanese refinery said.

Platts cash Oman spread to Dubai futures averaged lower at 86 cents/b premium in July so far, down from an average of 89 cents/b premium over June.

The spread, however, had also flipped into discount for the first time in two months earlier in the week. The spread had dipped into a discount of minus 20 cents/b on July 28 and was assessed at minus 15 cents/b at the Asia close on July 29. This compared to a premium of $1.25/b seen at the start of the month.

Oman values dipped amid a dearth of buying appetite from key buyers in China for the September-loading cycle, sources said.

China's crude oil inventory hit a fresh high of 889.35 million barrels in the week ended July 26, compared to 847.50 million barrels a month ago, data from intelligence firm Kpler showed.

Chinese refiners are struggling to digest mass crude oil cargoes purchased during the second quarter, while domestic fuel consumption slowed amid widespread flooding across 23 provinces during the month, Platts have reported.

REFINING MARGINS STAY SUPPRESSED

The lighter crude grades could see more support owing to slight improvements in light product cracks, market participants surveyed said.

"Light grades could be better than the heavier grades seeing how gasoil margins are better... it will be good if they [Middle Eastern producers] lower their OSPs by $1/b but I think 50 cents/b is more possible," a crude oil trader based in north Asia said.

Second-month gasoil swap crack versus Dubai averaged higher at $6.73/b for July so far, compared to an average of $5.76/b in June, Platts data showed.

However, others sources noted that a fall in gasoline margins is likely to weigh on the sentiment for the light sour barrels.

The second-month 92 RON gasoline swap crack to Dubai swap averaged at $2.76/b in July, falling from an average of $3/b in June, Platts data showed.

"There's not much improvement on margins and market has crashed considerably this week, expecting OSPs to come off by 30 to 50 cents," a source from a Chinese refinery said.