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Traders expect Saudi Aramco, ADNOC to raise OSP crude oil grade differentials for Asia

Singapore — Saudi Arabia is expected to raise its official selling price differentials for light and heavier crude grades loading in December for Asian buyers, reflecting the strong Dubai market structure during October, market participants said Monday.

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Five traders surveyed by S&P Global Platts said that state-owned Saudi Aramco was likely to raise the December OSP differentials for Arab Light, Medium and Heavy crudes by between 70 cents/b and $1.20/b.

For November, Saudi Arabia had lowered the OSP differential for Arab Light crude to Asia by 25 cents/b to a discount of 45 cents/b to the average of Platts Dubai/Oman assessments.

The spread between December cash Dubai and same-month Dubai swaps averaged a premium of 6 cents/b so far in October, compared with a discount of 87 cents/b in September. The Dubai market structure is said to be a key component in Saudi OSP calculations.

Article Continues below...



Traders also said that other Middle Eastern producers, including Abu Dhabi National Oil Co., were also expected to hike the differentials. Four regional traders surveyed by Platts last week said they expected ADNOC to raise the OSP differentials for Murban and Upper Zakum crudes to Platts Dubai crude assessments by around 15 cents/b and 35 cents/b respectively, for October.

Demand for both light and medium sour Abu Dhabi grades has been strong this month, with several Murban cargoes for loading in December heard fetching premiums of close to 20 cents/b to the grade's OSP early in the trading cycle, while some Upper Zakum cargoes traded at a premium of more than 40 cents/b.

"It has been a premium month [in the Middle East spot market] ... winter demand is healthy and margins have been improving. [The next round of] OSPs will definitely reflect all this," said a Singapore-based sour crude trader.

The second-month jet fuel/kerosene crack against Dubai crude swap averaged $12.99/b so far this month, the highest monthly average since November last year, when it averaged $14.04/b, Platts data showed.

EUROPEAN SUPPLIES, SURPLUS SAUDI BARRELS

It wasn't all sunshine for Middle Eastern producers, however, as traders pointed out that a slew of arbitrage cargoes of light sweet European crude were expected to reach Asia late in the fourth quarter and pose direct competition to Persian Gulf grades.

Market sources said earlier this month that at least 6 million barrels of North Sea Forties and Ekofisk Blend were heading to South Korea over November-December, with SK Innovation and GS Caltex having each bought at least 2 million barrels of the Forties crude for delivery in late December.

Up to 10 million barrels of CPC Blend crude are expected to make their way to the Far East from the Black Sea in December.

"The big Middle East producers must make moderate price hikes only. I am sure Aramco and ADNOC are aware of the rival grades coming here," said a trader with a Japanese refiner.

In addition, Saudi Arabia's scheduled maintenance at two of its largest refineries at the end of year could lead to additional crude supplies in the market, traders said.

"The major refinery turnaround [in Saudi Arabia] means that Aramco will likely offer surplus December and January Arab Light and Arab Medium barrels ... it shouldn't really make things too expensive with all the extra supplies to clear," said another Singapore-based crude trader.

Ras Tanura refinery will shut from early December for a major turnaround affecting the entire 550,000 b/d facility. The plant is expected to restart in mid-January 2017.


2017 TERM SUPPLY DISCUSSIONS


Apart from the next round of OSPs, many trade participants were also focused on negotiations for term crude cargoes for next year.

Market sources said that various regional end-users and major Middle Eastern producers had started discussions for new term deals for 2017 and that negotiations would last until the middle of next month.

Traders said North Asian end-users, in particular, were hoping that Middle Eastern producers would offer some generous deals as international flat prices had recovered from the lows seen early this year.

ADNOC was said to be offering destination-free cargoes of Murban and Upper Zakum crudes at a premium of around 15-20 cents/b to the grades' respective OSPs to term buyers for the first quarter of next year. "That's similar to term premiums for this year. It's only the starting offer, so maybe it's possible to reach an agreement at a lower level than that," said a North Asian sour crude trader.

A trader with a South Korean refiner said that Saudi Aramco was offering Arab Light and Arab Medium crudes for the first half of 2017 at between parity and a small premium to the Platts Oman/Dubai Average for the same loading month.

"The starting offers don't look bad but it could be better. European supplies [coming to Asia] will make them [the producers] think twice ... it's direct competition," the trader said.

"This is one of the best strategies for buyers to gain an upper hand [in the 2017 term negotiations with key Middle East crude producers]," another North Asian sour crude trader said, referring to the flurry of European arbitrage barrels due to reach Asia in December.

--Gawoon Philip Vahn, philip.vahn@spglobal.com
--Edited by E Shailaja Nair, shailaja.nair@spglobal.com