With Saudi Arabia cutting June selling prices for crude oil exported to Asia, some analysts say prices could fall further. Saudi Arabia moved preemptively to keep its Asian customers as the United Arab Emirates (UAE), which recently left the Organization of the Petroleum Exporting Countries (OPEC), is increasingly likely to export crude at lower prices.
On the 11th, Bloomberg and others reported that Aramco, Saudi Arabia's state-run oil company, set the official selling price (OSP) for June delivery of Arab Light, its main grade for Asia, at $15.5 per barrel, down $4 from May delivery.
The OSP is the price that shows how much a producer will add a premium or discount to the benchmark oil price by region. Aramco sets its selling price by adding or subtracting the OSP to the average prices of Dubai crude and Oman crude, the benchmarks. Saying the June OSP is $15.5 means it will sell at the average price of Dubai and Oman crude in June plus $15.5.
Saudi Arabia raised the May Arab Light OSP for cargoes loaded early last month to a record $19.5 after the Strait of Hormuz was blocked by the war between the United States and Iran, disrupting oil supplies. Aramco's OSP for crude exports to Asia was in the $0 range through March this year, then jumped vertically to $2.5 in April and $19.5 in May.
Saudi Arabia currently exports some crude through a pipeline to Yanbu port on the Red Sea coast, opposite the Strait of Hormuz. With exports disrupted as the strait was blocked by the war, it sharply raised the May OSP, but decided to trim it again in June.
The refining industry expects Aramco may keep lowering its OSP after June. That is because the UAE, which left OPEC, is expected to increase production and cut prices to boost its market share in Asia.
On the 28th, the UAE said it would leave OPEC as of the 1st of this month. The UAE's daily crude production capacity is 4.8 million barrels, but it had produced only up to 3.2 million barrels due to OPEC's constraints. The UAE plans to raise daily crude output to 5 million barrels next year. The UAE can also export directly from Fujairah port on the Indian Ocean without passing through the Strait of Hormuz, giving it an advantage over Saudi Arabia and other Middle Eastern countries.
Since the Strait of Hormuz was closed, Asian refiners have been moving to secure non-Middle Eastern heavy crude, another factor seen forcing Aramco to lower its OSP. Asian countries such as Korea, China and Japan account for more than 80% of Saudi crude exports.
Kim Tae-hwan, Deputy Minister of the Korea Energy Economics Institute (KEEI) Oil Policy Research Office, said, "Buyers in Asia are pursuing options to import heavy crude from Brazil and Canada," and added, "Saudi Arabia's OSP cut appears to be a move to keep its Asian clients."
A refining industry official said, "If U.S.-Iran cease-fire talks make progress and the Middle East stabilizes, Saudi Arabia will have no choice but to lower the OSP further."