Saudi Aramco and other Middle East producers are expected to cut official selling prices, or OSPs, for crude loading in November on weak demand-supply fundamentals that led to a sharp correction in benchmark Platts Dubai differentials in September, traders told S&P Global Platts.
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This month, a further reduction in prices of 30-50 cents/b across all crude grades could bolster buying interest among refiners in the region, market sources said.
Dubai futures spread -- understood to be a key element in OSP calculations -- averaged $1.42/b in September, sliding 80 cents from an average of $2.22/b in August, the data showed.
"I guess a 30-50 cent cut [expected]. Seems like OSPs haven't corrected enough," a trader in Singapore said.
"[For] Arab Extra Light, I feel 50 cents/b cut. For Lights, you always [see] Murban, but that has dropped. They [Aramco] price AXL and Murban closer," a trader with a South Asian refinery said.
In September, Saudi Aramco slashed prices for its October-loading Asia-bound crude prices by $1-$1.30/b, far exceeding the month-on-month drop in the Dubai cash/paper spread which was down 13 cents/b in September from August, according to Platts data.
While the cut in OSPs left market participants pleasantly surprised, calls for a reduction were increasingly gaining ground as expensive crude prices and dismal buying appetite plagued buyers in Asia, traders said.
"Generally you see OSPs from March, Saudi didn't follow [Dubai futures spread] formula always. I think last month [September] cut was compensation for previous months," a trader with a North Asian refinery said.
Meanwhile, soaring gas and coal prices before the winter season may revive demand for some medium and heavy crude grades which saw lackluster demand in September, the trader with the South Asian refinery said.
"Gas is expensive, they may go for oil heating. Heavier drop will be lesser maybe 30-40 cents/b [or] maybe even 30-25 cents/b," the same trader said.
380cst fuel oil cracks averaged at minus $5.22/b in September compared to minus $6.10/b in September while 180cst fuel oil cracks averaged minus $3.05/b in September compared to minus $4.59/b the previous month, data showed.
Demand cues in Asia continue to remain stable with focus largely on the key economies -- China, Japan and India.
While China's demand could grow amid expectations of more import quotas to independent refineries, Japanese buying could remain steady despite the onset of the winter season as well as an announcement for lifting of COVID-19 curbs next month.
"I believe China may pick up quickly with new quotas in China in Q4 and SEA [Southeast Asia] back to normal from COVID-19 lockdown," a second trader in Singapore said.
Indian demand is expected to remain largely steady as well with the festive season around the corner, though a third wave of the COVID-19 pandemic could limit oil import appetite, sources said.
Spot buying activity in September was capped despite the sharp cut in OSPs by Middle East producers, traders said.
With most Asian refiners receiving full term supplies for October, any hopes of an uptick in spot buying was further nipped in the bud, the trader in Singapore said.
"Spot market may be supportive next month [so] some drop [in OSPs expected] for sure to incorporate spot demand. 30-40 cents/b [cut] for Lights [at least]," the trader with the North Asian refinery said.
Product refining cracks have weakened as well, another trader in Singapore said supporting a cut in the prices of lighter crude grades.
"Cracks are weak but maybe lighter grades will be more valuable going into Q4," the third trader in Singapore said.
Second-month gasoline cracks averaged $8.75/b in September compared to $9.30/b in August, according to Platts data.
Differentials for ADNOC's lighter grades Umm Lulu and Das Blend could see little change to the Murban OSP, according to traders.
Upper Zakum's spread to Murban could widen next month to around $1/b compared to 60 cents/b this month, a trader with a European oil major said.
"It's [the] very tricky part. The spread has really widened the last few days," the trader said.
In September, the spread between Murban and Upper Zakum averaged around 73 cents/b, more than twice from the 36 cents/b spread in August, Platts data showed.