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Analysis: Deep cuts in Saudi Jan Crude OSPs may weigh on Asia spot market

Singapore — Spot differentials for Middle Eastern crudes are likely to come under pressure after the region's largest oil exporter Saudi Arabia cut the official selling prices for its term buyers in Asia.

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"I don't think we will take any other type of crude if we can help it," a trader with a North Asian refiner said Wednesday.

"The Saudi OSPs look too attractive this month. I don't think anyone can compete with that," he added.

Other traders echoed similar sentiment, signaling a potential drop in demand for spot cargoes as refiners try to maximize their liftings under term contracts with Saudi Aramco.

Aramco cut the price differential for January-loading Arab Light crude bound for Asia by $1/b from the previous OSP. Only a couple of crude market participants surveyed by Platts earlier this week had said that Arab Light OSP would be cut by this much. Most survey participants expected a 70 cents/b cut for the grade.

"Lights are [cut] very aggressively," another sour crude trader said.

"Guess they are trying to prevent too much US arb inflow," he said, suggesting that deep cuts may also be in response to a narrower Brent/Dubai spread last month.

The front-month Brent/Dubai Exchange of Futures for Swaps averaged $1.32/b over November, narrowing by more than a dollar from $2.61/b the month before, according to Platts data. A narrower EFS makes Dubai-linked Middle Eastern crudes relatively more expensive than Brent-linked grades from other regions.

Buyers of Saudi crude in Asia said the OSP cuts made Saudi crudes more attractive than other sour grades, and even compared with light sweet crude from other regions.

Saudi cuts are also likely to put more pressure on other Middle Eastern producers to make similar cuts in their OSPs or risk losing market share in Asia.

ASIAN BUYERS TO MONITOR OPEC PRODUCTION CUTS

Many in the market remained cautious ahead of the OPEC meeting on Thursday, as a potential agreement between OPEC and non-OPEC producers may limit how much additional crude refiners can get from Saudi Arabia.

"It has done this going into the OPEC meeting. There is the question of a production cut [at the meeting], which we will monitor," the second trader said.

Saudi Arabia has been supportive of production curbs in view of the statements made by top officials in recent weeks, but has yet to announce any specifics with regard to how much it may reduce production by, if at all.

Others see the latest OSP as a sign that Saudi Arabia will likely maintain the flow to Asia even in the event of an OPEC-led cut, probably at the cost of supplies to Europe or North America.

"If you see, it has cut [prices] only for Asia, so it might be signaling to us that there will be more cargoes in Asia," the second trader added.

Arab Extra Light OSP was expected to be cut by 80-90 cents/b. Saudi Aramco slashed the price differential for the grade by $1.50/b month on month, and cut Arab Super Light by $2/b for buyers in Asia.

These are the lowest price differentials Asia has seen since for the Saudi crude grades since 2017.

The price cuts for Arab Medium and Heavy grades came as an additional surprise to Asian buyers. Despite record high fuel oil cracks in recent weeks, Saudi Aramco cut the price differential for Arab Medium by 75 cents/b from December and for Arab Heavy by 40 cents/b. Survey participants had expected smaller cuts.

The core OPEC producer committee will meet on Thursday to discuss production cuts similar to that implemented in 2016.

--Eesha Muneeb, eesha.muneeb@spglobal.com

--Edited by E Shailaja Nair, shailaja.nair@spglobal.com