Saudi Aramco's Formula Prices Show Restraint

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After months of pricing its crude exports to Asia at the high end of expectations or even higher, Saudi Aramco has surprised the market with unexpectedly moderate increases for cargoes loading in September. The move probably reflects uncertainty about oil demand caused by the Delta variant of Covid-19, increased competition from arbitrage crudes and some compensation for its high prices for August loadings, market sources said. Aramco raised the formula price of its light, sour Arab Extra Light crude by 50¢/bbl (see table). It also increased the prices of its medium, sour Arab Light and Arab Medium grades by 30¢/bbl each. And it bumped up the formula price for heavy, sour Arab Heavy crude by 20¢/bbl (IOD Jul.7'21). A Northeast Asian refiner who is often critical of Saudi formula prices described the latest batch as too good to be believed. Two other Asian refiner sources and two other market sources described the prices for September loadings as within expectations or lower than expected. Aramco "could have raised it more," one of them noted. Dubai, Oman Price Structures To put the increases in context, the average monthly Platts Dubai and DME Oman price structures strengthened by an average of 45¢/bbl from June to July, said three market sources. The structures are complex calculations that track intermonth spreads and are the key determinants used by Saudi Aramco and other Mideast producers to set their formula prices. But -- with the exception of Arab Extra Light -- Aramco's price increases were all significantly lower than the 45¢/bbl strengthening of the price structures. Aramco had previously been setting its Asian formula prices for several months at levels that were at the high end of what the market considered acceptable -- or even higher (IOD Mar.8'21). Because of this, Aramco might have decided to moderate the increase in its September formula prices, said an Asian refiner source and an analyst. Delta Variant In the last few weeks the highly infectious Delta variant of Covid-19 has spread rapidly around the world -- even in China, which has moved swiftly to quarantine and test huge swathes of people. With several Chinese cities already under lockdown, the country's demand for oil products is likely to fall, said a Chinese refiner source. This has led to uncertainty about oil demand in Asia, which might have prompted some restraint on Aramco's part as it updated its formula prices for cargoes loading in September, said two refiner sources and two market sources. Mideast crudes in general are facing greater competition from long-haul North Sea, US and Latin American arbitrage crudes because the Dubai benchmark has strengthened relative to the global Brent crude price benchmark. This might also have factored into Aramco's decision to limit the increase in its Asian formula prices, said two market sources. The Brent-Dubai Exchange of Futures for Swaps (EFS), which tracks Brent's strength relative to Dubai, slumped to $3.69/bbl on Aug. 4, narrowing the gap by 47¢/bbl compared to a month ago. This means that Saudi crude -- priced in part against Dubai crude -- became more expensive relative to crude from the North Sea or West Africa that are priced against Brent. Freddie Yap, Singapore Saudi Arabia Differentials

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