COLUMN-Saudi price rise for Asia suggests tentative oil recovery: Russell – Reuters UK

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(The opinions expressed here are those of the author, a
columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, March 3 – Saudi Arabia’s
decision to raise oil prices to its main customers in Asia may
just be another sign that crude markets are indeed on the road
to recovery.

The world’s biggest oil exporter lifted the official selling
price (OSP) of its benchmark Arab Light crude by 25 cents a
barrel for cargoes loading in April.

The April OSP for Arab Light will be a discount of 75 cents
a barrel to regional market Oman/Dubai, down from a discount of
$1 for March cargoes.

While the OSPs have moved around a bit in recent months, a
trend is emerging toward higher prices over the past six months,
with the discount having dropped from $1.60 a barrel for
November cargoes.

Saudi Aramco, the kingdom’s state oil company, tends to
adjust prices based on demand from refiners and changes in the
value of oil products.

Prices for Asian refiners, who buy about two-thirds of Saudi
Arabia’s exports, also tend to reflect changes in the spread
between global benchmark Brent and regional marker Dubai.

The Brent-Dubai exchange for swaps (EFS) DUB-EFS-1M, which
measures the premium of Brent over the Middle East grade, has
been trending higher in recent months, rising from 61 cents a
barrel on July 8 last year to $3.28 on Wednesday.

A gain in the premium for Brent over Dubai normally prompts
rising Saudi OSPs for Asia as the kingdom tries to ensure parity
between prices for customers in different parts of the world.

However, it’s worth noting that the trend toward a higher
Brent-Dubai spread has been in place for several months longer
than the trend of rising OSPs.

This suggests that it’s only recently that the Saudis have
become more convinced that the demand gains in oil from Asian
refiners are sustainable, giving them the confidence to start
raising prices.

It’s also the case that the OSPs remain at levels well below
what they have been in the past when the Brent-Dubai spread
reached levels above $3 a barrel.

In January 2014, when Brent-Dubai (EFS) averaged $3.96 a
barrel, the Saudi OSP for Arab Light was at a premium of $3.75
over Oman/Dubai. Another example from recent years is that when
the EFS was $3.28 in August 2012, the OSP was a premium of

What this shows is that Saudi oil prices are still being
discounted for Asian refiners, relative to past experience.

This is probably a reflection of the Saudi decision not to
act as the swing producer that balances the market by cutting
output in times of surplus, but rather to retain market share
even at the expense of lower prices.

The question that remains to be answered is whether demand
for crude really is strong enough to support the apparent Saudi
decision to start normalising its OSPs.


China, the world’s second-biggest crude importer, did
experience a 4.6 percent drop in January from the same month a
year earlier, shipping in about 6.28 million barrels per day

However, imports rose 8.8 percent in 2015 over 2014, to
about 6.71 million bpd, as China increased strategic stockpiling
and boosted refinery runs and exports of products.

It’s also likely that the timing of the Lunar New Year
holidays may have affected January imports, and they are
expected to recover in February, with Thomson Reuters Oil
Research & Forecasts estimating imports for the month at 7.26
million bpd.

China’s oil demand will rise 4.3 percent in 2016 to 11.32
million bpd, according to state-owned oil major China National
Petroleum Corp.

India, Asia’s second-biggest importer after China, is also
experiencing strong growth in demand, with fuel consumption
rising 12.7 percent in January from the same month a year
earlier, the fastest pace in three months.

Crude oil imports were 4.25 million bpd in January, up 1.5
percent from the same month in 2015, according to government

With demand growth in Asia’s top two importers looking
reasonably strong, there does appear to be some justification
for the view that oil prices will receive support from the
demand side of the equation.

The supply side remains the main obstacle to a sustained
rise, with Iran still planning to increase its exports, as is
regional competitor Iraq.

So far the gains in Oman crude futures look
impressive in percentage terms, with the contract having gained
40.6 percent since the record low close of $23.78 a barrel on
Jan. 20.

In dollar terms, Wednesday’s close of $33.44 is $9.66 a
barrel higher than the low, but this level is still not much
better than quarter of the $110.80 the contract was in June
2014, the peak for that year, and is barely half of the 2015
peak of $65.52.

The price action and demand figures suggest that Asia’s
crude markets are at the start of a long road of price recovery,
but it’s worth remembering that Oman futures rallied almost 47
percent between mid-January and early May last year, before
spending the rest of the year slumping.

(Editing by Joseph Radford)

COLUMN-Saudi price rise for Asia suggests tentative oil recovery: Russell – Reuters UK}