On 13 April, Saudi Arabia announced the Official Selling Prices (OSPs) for its May crude oil exports. The new OSPs speak volumes about Saudi Arabia's crude export strategy after agreeing to cut production in the OPEC+ deal on 10 April 2020.
Wood Mackenzie research director Sushant Gupta said: “Looking at the May OSPs, it is clear that Saudi Arabia wants to ensure its crude remains very competitive in Asia. It has almost doubled the discounts to Asian refiners in May 2020 compared to April 2020. Asian refiners are to enjoy the steepest discounts compared to other regions.”
Saudi Arabia increased the May 2020 OSPs to the US refiners, indicating a desire to export lower volumes to the US. For Saudi Arabia, these volumes are less lucrative.
For Europe and the Mediterranean, the OSPs are maintained, continuing the pressure on Russian Urals’ pricing towards Europe.
Crude runs in Asia are expected to recover from a low point of 26 million bpd in April 2020 to about 29 million bpd by June 2020, as a result of an expected recovery in oil demand. At the same time, with OPEC+ production cuts likely fully in place by June 2020, crude markets in Asia could also get tighter.
Gupta said: “To meet the entire demand from the refining system, Asian refiners will need to draw down crude inventories built through H1 2020 in their respective countries, and crude producers will have to rely on selling crude from inventories built through April 2020. This will support crude prices.
“We see large changes to crude supply sources for Asian refiners as they rely heavily on crude producers directly impacted by the OPEC+ deal, such as Saudi Arabia, Iraq, Kuwait, the UAE, Angola, Nigeria and Russia. Asia represents a significant share of the exports from these countries.
“No doubt exports to Asia from Saudi Arabia and Russia will be impacted, but because Asia provides a higher netback to both Russia and Saudi Arabia, both will ensure that Asian market volumes fall the least as they cut output. We would expect both producers to divert volumes towards Asia from other regions.
“The discounted OSPs does not continue the price war, rather it is a necessary step to protect Saudi Arabia’s largest and most profitable export market, Asia. With such steep discounts in May 2020, Saudi grades look very attractive to Asian refiners compared to US WTI and key African crude grades.”
Wood Mackenzie expects the light-heavy crude differential to narrow as medium and heavy crude production is preferentially cut as part of OPEC+ deal. Steeper discounts for Saudi grades are a means to compensate refiners for a narrower light-heavy differential.
The deepening OSP discounts would also be required to account for a softening VLCC freight rates driven by OPEC+ production cuts. A lower VLCC freight rate improves relative economics for long-haul shipments such as US WTI crude and Nigeria Bonny Light crude to Asia compared to crudes from the Middle East.
Gupta said: “With deeper discounts to Asia, Saudi Arabia is ensuring that it does not lose access to buyers if oil demand remains weak. Other suppliers looking to position themselves in Asia will have to pay close attention to the Saudis’ pricing.
“ESPO crude from Russia would require a deeper discount to Dubai benchmark to remain competitive against Saudi Arabian crudes. US and African crude grades also would need to be further discounted to compete into Asia.”
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/16042020/wood-mackenzie-saudi-arabia-crude-osps-bode-well-for-asia/