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COLUMN-Saudi crude premium may not rise much further: Clyde Russell
August 5, 2013 / 6:39 AM / 4 years ago

COLUMN-Saudi crude premium may not rise much further: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Aug 5 (Reuters) - Asian refiners are bracing to pay more for crude from top supplier Saudi Arabia, but the seasonal upswing in prices may not be as steep as in previous cycles.

Saudi Aramco is expected to lift the September official selling price (OSP) of its benchmark Arab Light grade this week by $1 a barrel, according to a Reuters survey of traders and refiners in Asia.

This would take the premium to $2.90 a barrel over regional benchmark Oman/Dubai, the highest level since premiums hit $3.45 for cargoes shipped in February this year.

It’s no surprise that the Saudis are likely to raise prices given the outlook for a tighter market for Middle East medium and heavy crudes, from both a demand and supply perspective.

Iraqi shipments may drop in September because of maintenance and there is also the risk of disruptions from rebel activity in Iraq’s north, as well as in other producers such as Yemen.

Refiners are also increasing runs in Asia after the end of maintenance season and an improvement in margins.

But while the Saudis will no doubt look at these factors when setting their OSP, the best indicator appears to be the spread between light crude benchmark Brent and Dubai.

The one-month exchange for swaps DUB-EFS-1M has been trending higher since April, with Brent’s premium to Dubai rising from $2.30 a barrel on April 18 to a recent peak of $5.01 on July 16, a gain of 118 percent.

It has since eased to $4.30 on Aug. 2, but the point is that it was at levels close to $5 a barrel at the time the Saudis would have been working out the OSP for September.

The last time Brent’s premium to Dubai went above $5 a barrel, the OSP for Arab Light, which is actually a medium grade, also rose, and it only started to decline when the premium narrowed again.

The exchange for swaps was around $5 for much of the period between early December 2012 and early March this year.

The OSP rose to a premium of $2.95 a barrel in December, to $3.30 in January before reaching February’s peak of $3.45.

As Brent’s premium to Dubai eased from the 2013 high of $5.34 a barrel on March 4 to the low of $2.30 in April, the OSP also declined -- first to $1.95 in March and then to $1.30 the following month.

The key question then becomes what is the outlook for Brent vis-à-vis Dubai and here there are several factors at work, and, as is the nature of these things, some are pulling in different directions.

The factors pushing the Brent premium up appear more short term in nature while those narrowing it seem more structural.

Brent rose to a four-month high last week, partly on better economic news out of the United States and China, but also on supply disruptions of light oil from Libya.

While Dubai futures also hit a four-month top last week, the outlook for demand in Asia, which takes roughly two-thirds of medium to heavy Middle East oil, has been constrained by slower-than-expected economic growth in China and India.

Although China’s official Purchasing Manufacturers’ Index rose in July, it’s too early to conclude that the economy has taken a turn for the better, so demand growth in Asia may remain muted, but the risks are it improves.

For the United States and Europe, much of the recent economic improvement appears priced into Brent, while the likelihood of supply dislocations caused by rising U.S. shale output appears not to be fully priced.

Brent is being supported in the short term by protests at oil facilities in Libya, which have cut more than 500,000 barrels per day from the North African nation’s output.

Assuming these issues can be resolved, the trend toward Brent’s premium over Dubai narrowing should continue, and if it does, the Saudi OSP should stop rising. (Editing by Himani Sarkar)

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