The Crude Report: Sour price cuts provide sweet relief to refiners?

Author Argus

Saudi Aramco announced its official prices for October-loading crude exports last week, and this episode discusses the impact of these prices on the Asian market.

Every month, Mideast Gulf crude producers, including Saudi Arabia, Kuwait and Iraq, announce official prices for their crude exports to different regions. These prices are usually announced around the first week of each month and are anxiously awaited by refiners.

Listen in as Fabian Ng, Crude Reporter, comments on how these official prices might impact the Asian market.

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Transcript

Jessica: Hello, and welcome to The Crude Report, Argus' podcast series on global crude oil markets. This is Jessica Tran for Argus Media. Every month, Mideast Gulf producers, including Saudi Arabia, Kuwait, and Iraq announced official formula prices for their crude oil reports to different regions that sometimes also serve as their export prices for term contracts. These official prices are usually announced around the first week of each month and are anxiously awaited by refiners because it could determine their crude term supplies for that month. These official prices have recently become more significant following this year's Opec+ output cut agreement, as it is a way for producers to control their exports. So far, we have seen some months when prices were set at higher than expected levels, possibly to discourage term buyers from lifting maximum volumes and allow producers to keep production low. Saudi Aramco announced its official prices for October loading crude exports last week. And with me is Fabian Ng, one of our crude reporters based out of Singapore to discuss the impact of these prices on the Asian market. Hi Fabian. Thanks for your time today. 

Fabian: Hi Jess. Thanks for having me on the podcast today. 

Jessica: Fabian, let's start with the October Aramco official prices and how Asia-Pacific buyers have reacted to them. 

Fabian: Well, Saudi Aramco had set its official October prices to Asia-Pacific largely within buyer's expectations. The October formula price for Aramco's flagship crude light was cut by a $1.40/bl from September. While light sour Arab Extra Light was cut by $1.50/bl. Refiners in Asia had hoped that Aramco would cut the Arab Light and the Arab Extra Light prices by more than $1/bl each. To reflect the weak Asian refining margins, especially for jet fuel. Singapore jet fuel crack spreads, which is the spread of jet fuel to the Mideast Gulf benchmark Dubai crude have been negative since the 18th of August. This is actually unusual because jet fuel cracks are normally at a premium. And it means that refiners are currently producing jet fuel at a loss. The last time that jet fuel cracks were negative was back in May during the peak of the Covid-19 pandemic, but limited airline travel due to fears of a second wave of the pandemic, has dampened jet fuel demand and kept jet fuel prices under pressure. Diesel crack spreads in Asia have also weakened. 

Jessica: So what about the October official prices for the medium and heavy sour crudes? What did Aramco do for those? 

Fabian: So Aramco cut the October Arab medium price to Asia by a $1.20/bl and the Arab heavy price by 90¢/bl. This was also expected as the fuel market in Asia was quite firm the past month. 

Jessica: So does it sound like buyers are happy with the latest Aramco prices? In general, what are Asian buyers' views about the Aramco crude prices in the last few months? 

Fabian: Well, I think Asian refiners will at least be relieved by the cuts in the October Aramco prices. In recent months, Asian refiners have been a bit disappointed with the Aramco official crude prices as they felt that those prices did not fully reflect the weakness in the oil markets. The recovery for refined oil products has been slow and this has impacted crude demand. So this weakness has actually been reflected in the price structure of Mideast Gulf benchmark Dubai crude, which fell into a contango in August from a backwardation in July. So that is to say prompt prices actually fell below those of forward prices. Back in August prices for the front month October Dubai contract fell to a discount of 70¢/bl on average to prices in the forward December contract. This compares with July when the front month Dubai contract was at a 60¢/bl premium on average to the third-month Dubai contract. The fall in the contango indicates a softening crude market and producers, including Saudi Arabia, considers the change of this intermonth spread as a factor when they set their crude formula prices to Asia. 

Jessica: And now that Aramco prices are set, what do we think is next? 

Fabian: Well, Aramco monthly prices are very important because Saudi Arabia is a huge crude supplier to Asia. But what is also important is that other Mideast Gulf producers such as Kuwait, Iraq, the UAE, they all tend to follow the direction of Aramco when they set their own official prices. And so this was again the case this month because we saw the other producers matching the deep Saudi price cuts for their own October loading crude exports by slashing prices by more than $1/bl. And because the Mideast Gulf is still the main crude supply source for many Asian refiners, these lower prices will help their bottom line and help them to recoup some of the refining losses they have faced in recent months. I think another key factor to watch will be the result of October term crude allocations. It will be interesting to watch, to see if Asian refiners are able to secure their requested volumes for Mideast Gulf producers following the deep price reductions because of the prospect of a tightening supply outlook. Abu Dhabi’s Adnoc has already announced the 30pc cut to October term crude nominations while Iraq has been under amounting pressure from the other OPEC Plus members to improve its compliance with the alliance’s output cut agreement. 

If refiners in Asia-Pacific were to find it difficult to secure the full nomination of term crude, it may prompt buyers to turn more to spot cargoes and lift premiums for spot Mideast Gulf crudes. So we have actually seen some early signs of this with spot supplies of Iraqi Basrah Light crude exchanging hands at a firmer premium to its formula price compared to spot trips for the grade done last month. I think overall, the uncertain demand outlook means that it is still too early to say whether market sentiment will remain supported, meet the looming specter of a second wave for Covid-19 infections and lockdowns. What is certain is that refiners in Asia-Pacific will appreciate this latest round of price reductions in a time when refining margins continue to be lackluster. 

Jessica: Thanks for your time today, Fabian. 

Fabian: No problem. Thanks.

Jessica: For more in-depth analysis and coverage of Middle East crude markets, consider subscribing to the Argus Crude service, your master source for daily news, prices and analysis for more than 80 different internationally traded crude streams. You can find more information on the service at www.argusmedia.com. Thanks for tuning in, and we look forward to you joining us on the next episode of The Crude Report.
 

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