(Graphic of Brent-Dubai swap vs Saudi OSP: tmsnrt.rs/2mvKQFG)
By Clyde Russell
LAUNCESTON, Australia, March 7 A decision by
Saudi Aramco to cut the price of its benchmark Arab Light crude
to Asian refiners for April-delivery cargoes has prompted
speculation that the world's top oil exporter is chasing market
There is always a risk in over-interpreting moves in
Aramco's official selling prices (OSPs), and trying to fit them
into a narrative that supports a particular view of the state of
Perhaps a better approach is to look at whether the move in
the OSP goes beyond what might be justified by changes in the
market structure for crude oil in Asia, the region that buys
about two-thirds of Saudi oil.
First, the facts. Aramco cut the OSP for Arab Light for Asia
to a discount of 15 cents a barrel over the Oman-Dubai benchmark
for April cargoes from a premium of 15 cents the prior month.
The effective 30 cents a barrel reduction came against a
backdrop of a weakening premium for Dubai crude over global
benchmark Brent and softer margins for key oil products in Asia,
such as gasoline, naphtha and to a lesser extent, diesel.
The Brent-Dubai exchange for swaps DUB-EFS-1M, a measure
of the premium of Brent over the Middle East grade, dropped to
$1.08 a barrel on Feb. 28, the lowest in 18 months.
The profit of making a barrel of gasoline in Singapore
GL92-SIN-CRK, known as the crack, has almost halved in just
under a month, dropping to $7.30 a barrel on Monday, down from a
recent peak of $13.16 on Feb. 2.
The same measure for gasoil, the base product
for diesel, was at $11.66 a barrel on Monday, down from $12.66
on Feb. 23.
The narrowing of the Brent-Dubai premium and lower refinery
margins was always going to make it likely that Aramco would cut
the OSP for Arab Light for Asian refiners.
The question is whether the cut is big enough to justify
claims that the Saudis are taking the view that they need to
offer deeper discounts in order to maintain market share.
This question doesn't have a definitive answer, but past
evidence suggests that the lowering of the OSP is largely in
line with the underlying market structure, and therefore doesn't
show any untoward concern about market share on the part of
When the Brent-Dubai premium was last around current levels
in mid-2015, the Saudis responded by cutting the OSPs, with the
Arab Light OSP going from a premium of 40 cents a barrel for
September 2015 to a discount of $1.60 by November of that year.
Of course, this was at a time when the Saudis were actively
engaged in a battle for market share in Asia with other Middle
East producers such as Iran and Iraq, as well with Russia and
Atlantic Basin countries such as Angola.
With the decision by OPEC and its allies, including Russia,
to reduce output for the first six months of 2017, in theory the
Saudis shouldn't be engaged in a market share war.
In practice, though, no doubt they wish to maintain their
share among key Asian buyers such as China and India.
Hence, the reduction of the OSP for April cargoes for Arab
Light should be seen as the Saudis doing just enough to
hopefully maintain market share, while still meeting their
commitment in terms of the November agreement to curb output.
It should be borne in mind that Arab Light isn't actually a
light crude like Brent, having an API gravity of around 32-33
This makes it a medium crude, and considerably heavier than
Brent's 38.3 degrees API gravity, although it is considerably
lighter than Aramco's Arab Heavy grade, with an API gravity of
Aramco's Brent competitor is Arab Extra Light, which has an
API gravity of around 39.4 degrees.
The OSP for this grade for Asian buyers was cut by 75 cents
a barrel for April cargoes, to a premium of 95 cents a barrel
This deeper cut is likely a reflection of the higher
availability of light crudes in Asia, especially from Atlantic
Basin producers such as Angola and Libya.
A side-effect of the cuts by OPEC and its allies has been to
narrow the premium of light crudes over heavier grades, as it
has largely been heavy barrels that have been taken off the
The Saudi cuts for its lighter crudes is a response to that
dynamic, and it's worth noting that Aramco kept the OSP for its
Arab Heavy grade for April unchanged at a discount of $2.60 a
barrel to Oman-Dubai.
What the Saudis are most likely doing is simply responding
to market conditions, making their lighter grades competitive in
what is a well-supplied market, but keeping prices steady for
heavier crude, the market for which is now tighter than it was
prior to the start of the OPEC cuts.
(Editing by Richard Pullin)