(The opinions expressed here are those of the author, a
columnist for Reuters.)
* Graphic of Saudi OSP vs. Brent-Dubai swaps: tmsnrt.rs/2o55LQ4
By Clyde Russell
LAUNCESTON, Australia, April 6 Saudi Aramco's
decision to cut prices for lighter grades of oil for customers
in Asia is a sign of just how seriously the world's top crude
exporter is taking its battle with U.S. shale and other
producers outside last year's move to cut output.
The Saudi Arabian state oil company lowered the official
selling price (OSP) of its benchmark Arab Light grade by 30
cents a barrel for May cargoes destined for Asia, which buys
about two-thirds of the kingdom's exports.
This took the OSP to a discount of 45 cents a barrel to the
regional benchmark Oman-Dubai. It was the second straight month
that Aramco cut the price, even though the Saudis are the major
player in the agreement between producer group OPEC and its
allies to cut output by 1.8 million barrels per day (bpd) in the
first six months of the year.
Aramco also reduced the OSP for its Arab Extra Light grade
by 35 cents a barrel to a premium of 60 cents over Oman-Dubai
for May-loading cargoes for Asian customers, and for Super Light
by 20 cents. In contrast, the OSPs for Arab Medium and Heavy
were left unchanged.
It's worth noting that Arab Light isn't actually a light
crude in the mould of global benchmark Brent, as its API gravity
of 32-33 degrees makes it a medium grade, compared with Brent's
light 38.3 degrees.
But Arab Extra Light and Super Light are more directly
comparable to Brent, and they both saw price reductions.
It's appears that Aramco, mainly a producer of medium to
heavy grades, is responding to the light grades of crude
swamping Asian markets as U.S. producers ramp up shale output
and West Africa increases production.
Another way of looking at it is by noting the difference
between light and heavy prices in Asia.
The main way of doing this is via the Dubai-Brent exchange
for swaps DUB-EFS-1M, which measures the premium of the
lighter grade over its heavier Middle Eastern counterpart.
This has been on a narrowing trend this year as heavier
grades became more scarce following output cuts by OPEC and its
allies, including Russia.
The premium commanded by Brent dropped from $4.65 a barrel
in January 2016 to just $1.08 on Feb. 28, a 17-month low.
When the premium of Brent over Dubai is declining, Aramco
has in the past adjusted its Asian OSP lower as well, which acts
to keep its crude prices relatively constant between regions.
However, since the Feb. 28 low, the Brent-Dubai swaps have
been trending modestly higher, reaching $1.28 a barrel on April
In theory, this should have resulted in a small increase in
the Saudi OSP, or perhaps steady prices, rather than the price
cuts actually delivered.
LIGHT OIL PUSH
This indicates that the Saudis are pushing their lighter
grades into Asia at competitive prices. Physical oil traders
also report that there is no shortage of light crude and cargoes
are trading at discounts to their OSPs.
It seems that in Asia the output cuts by OPEC and its allies
have shifted the battleground to lighter grades of crude, and
the reason is starting to show up in import figures.
Data compiled by Thomson Reuters Supply Chain and Commodity
Forecasts indicates that Middle Eastern producers are losing
ground in Asia.
The Middle East's share of Asia's crude imports in March
was 61.5 percent, down from as high as 65.9 percent as recently
as January, according to vessel-tracking and port data.
In contrast, the share from exporters in the West, which
includes U.S. shale, Canada, Brazil and even cargoes from
Europe's North Sea, rose to 19.7 percent, up from 17.9 percent
in January, and the second-highest share in the past year,
behind only December's 19.9 percent.
It appears as if the Saudis are attempting to maintain
market share in Asia by trying to match the pricing and
availability of lighter crudes from producers outside the output
agreement between OPEC and its allies.
At the same time, they are reducing shipments of heavier
grades of crude to meet their commitments to reduce overall
If this trend continues, it's possible that Asian markets
will end up with a surplus of lighter crudes and a deficit of
heavier grades, which could conceivably send the Brent-Dubai
swaps into a discount for the first time in seven years.
(Editing by Richard Pullin)