Saudi Arabia, the world's largest crude oil exporter, has attached a record-high premium to its crude prices. With the Strait of Hormuz, a key shipping lane, effectively shut amid military tensions with Iran, global crude supply has been rattled.
According to the Financial Times (FT) on Apr. 6, Saudi state oil company Aramco set the May delivery price for its flagship grade, "Arab Light," at $19.50 per Barrel above the Oman/Dubai benchmark. It is the highest premium in 26 years; in the past, it rarely exceeded $10.
Prices for crude bound for Europe also surged. European customers seeking Saudi crude now have to pay an additional $24–$30 per Barrel on top of the Brent benchmark, which is about $108 per Barrel. The FT said it is unusual for Saudi Arabia to raise prices across all regions simultaneously.
The immediate cause of the price spike is logistics disruption. Most Saudi crude exports depart from the Persian Gulf, but as Iran has tightened control over the Strait of Hormuz, vessel traffic has been severely restricted.
As a countermeasure, Saudi Arabia is running its east–west trans-Arabian pipeline at maximum capacity to move crude to the Red Sea coast. Loadings at the western port of Yanbu have risen to record levels, but total exports still appear stuck at about half of normal. The hardest hit are Asian refiners that rely on Middle Eastern high-sulfur crude. With alternative supplies limited, cost pressures are mounting rapidly. Some vessels are transiting the Strait of Hormuz on a limited basis, but conditions remain unstable.
The Organization of the Petroleum Exporting Countries (OPEC) and OPEC+, a coalition of major oil producers, agreed to boost output in May, but the increase is assessed to cover only about 2% of the crude supply blocked by the Strait of Hormuz shutdown. Moreover, the additional barrels are also trapped behind the strait, prompting market assessments that the move is a "symbolic step with no real effect."