Saudi July crude prices disappoint Asian refiners

Saudi Arabia's July official formula prices for its crude exports to Asia-Pacific, which increased by $5.60-7.30/bl, were a disappointment to the region's refiners hoping for price increases in a $2-4/bl range. The increase may not necessarily lead to drastic regionwide cuts in term Saudi crude that Asia-Pacific refiners plan to nominate for July loading given their limited alternatives.

Saudi Arabia's state-owned Saudi Aramco set the July formula prices to Asia-Pacific for its main crudes Arab Extra Light, Arab Light, Arab Medium and Arab Heavy at the highest level in four months. The July price hikes follow increases of 90¢-$1.70/bl that Aramco made last month for the June formula prices of these four grades destined for Asia-Pacific.

A southeast Asian buyer said the Saudi July formula prices were higher than they expected, with at least one Indian refiner also surprised that the July prices rose so sharply relative to June. Several refiners in northeast Asia considered the July Saudi prices high and above their predictions, although they added that it was not a total surprise given the 6 June Opec+ agreement to extend the first phase of its historic two-year production restraint deal to the end of July for all participants except Mexico. Japanese refiner JXTG said its purchases in July will be unaffected by the rise in July-delivery formula prices.

Asia-Pacific refiners have limited alternatives, as other Mideast Gulf producers usually set their crude formula prices in line with Aramco. Cutting July term loadings could also be a risky move for refiners, because the trade cycle for July-loading spot cargoes has largely ended, while spot prices for August-loading cargoes may rise in the current environment of tighter Mideast Gulf supplies.

Saudi crude provides base-load supplies for many refiners in Asia-Pacific, allowing Aramco to raise formula prices to the region. Asia-Pacific is Aramco's main market — over 70pc of the 7.76mn b/d of Saudi crude that loaded during January-April headed to the region, according to Argus tracking.

But the rise in the Saudi crude prices will hit Asia-Pacific refiners' margins, as the region's demand for refined oil products has not fully recovered. Certain countries such as Vietnam, Australia, New Zealand, Japan and South Korea are seeing some recovery but demand in key markets like Indonesia and the Philippines remain weak. While gasoline and jet-kerosine margins have firmed, and have been positive in the past week, they are still well below levels in February and in the first half of March before the impact of Covid-19 fully hit oil demand. Some Asia-Pacific refiners forced to reduce runs earlier this year amid falling demand have begun to raise runs. But products' demand is only starting to recover, with sharply rising costs of crude feedstock could prompt refiners to consider run cuts once again.

Relatively high crude official formula prices may also lead to a flow of cargoes out of floating storage, if refiners are able to secure these prompt supplies at cheaper prices. It is unclear how much crude is in floating storage in Asia-Pacific, but volumes had accumulated in the past few months when the wide crude contango, with forward prices higher than prompt prices, made storage feasible. The currently narrowing contango could encourage sellers to push out volumes from storage, replenishing the region's availability.