Aramco Slashes Asian Crude Prices

Copyright © 2021 Energy Intelligence Group

Saudi Arabia has slashed its official formula prices for crude exports to Asia, startling many market players.

The price drops are the deepest in a year for major Arab Light and Medium grades, and the biggest in nearly a year and a half for Arab Heavy.

The latest cuts appear to be driven by a combination of factors including competition from a flood of cheap US crude, increased Saudi production, and competition with other Mideast exporters ahead of increases in Opec-plus production, market sources said.

For October-loading crude exports to Asia, Aramco slashed $1.20 per barrel off the formula price of light, sour Arab Extra Light, $1.30/bbl off the medium, sour Arab Light level, and $1.00/bbl each off the medium, sour Arab Medium and heavy, sour Arab Heavy formula prices .

Aramco’s slashing of its Asian formula prices has left Abu Dhabi’s crude official prices looking expensive in comparison, while also pressuring major Mideast producers like Iraq and Kuwait to follow suit.

“The cuts were huge,” said a Northeast Asian refiner source. “Much bigger than expected.”

The Saudi price reductions dwarf the drop in the Platts Dubai and DME Oman price structures.

The structures are complex calculations that track intermonth spreads and are seen as a key input in Saudi crude pricing decisions.

Those monthly averages of the two structures weakened by only around 24¢/bbl from July to August, said a trading analyst.

Mars Attacks

Pricing came under pressure earlier when a flood of at least 12 million barrels of cheap US crude -- most of it heavy, sour Mars -- made its way into the Asian market.

The Mars cargoes were much cheaper on a delivered basis than comparable Saudi Arab Medium crude and trading sources said they were not expecting Saudi Arabia to try to compete with such low prices.

November and December arrival Mars cargoes bought at premiums ranging from 50¢/bbl to around $1.70/bbl to the Dubai benchmark price on a delivered basis into Asia, put significant pressure on Mideast producers including Aramco.

Now, Aramco sliced $1.00/bbl off the October-loading Arab Medium formula price, in what appears to be -- at least in part -- a response to the competition from Mars, said four market players.

With freight from the Mideast to China at roughly around 80¢/bbl, the latest formula price makes the delivered cost of Arab Medium into Chinese ports a premium of $2.25/bbl to the Dubai/DME Oman benchmark price average. This lands it much closer to the upper end of the Mars delivered prices.

Ironically, Hurricane Ida damaged a key transfer hub handling Mars crude, potentially putting at least some of those Mars cargoes at risk.

Production and Competition on the Rise

Aramco could have also slashed formula prices to try and sell more to its term buyers amid increased competition, market sources indicated.

Saudi Arabia’s production is set to rise in October after Opec-plus approved a 400,000 barrel per day jump in output for the grouping.

Trading and refining sources noted that Aramco could be ramping up its competition with Abu Dhabi, especially with the $1.20/bbl cut off its Arab Extra Light formula price.

The October-loading official price of Abu Dhabi’s benchmark light, sour Murban crude these days was set on Sep. 3 at $69.73/bbl by the ICE Futures Abu Dhabi Murban contract.

Arab Extra Light looks to be around 60¢/bbl cheaper than Murban, said an Asian refiner source and two trading analysts, making Murban “expensive.”

Rival Mideast producers, especially those like Kuwait, Iraq and Iran that often follow Saudi Arabia’s price trends, are now under pressure to cut their formula prices deeply too, one source noted.

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