(Bloomberg) -- For the first time since the oil price recovery started three months ago, Saudi Arabia and other top Middle East producers are coming under heavy pressure to cut the price of their barrels, a sign of how the rally has begun to stall.
The change doesn’t herald the return of ultra-low oil prices seen in March and April, but rather indicates that futures are struggling to advance much above $40 a barrel. New spikes in coronavirus cases are depressing fuel demand as local lockdowns, delayed returns to places of work, and canceled vacations all restrict the movement of people. As that slows the consumption recovery, crude production is rising, potentially tipping the supply-and-demand balance back toward surplus.
A big clue into just how far the global market’s dynamics have really shifted will become clear in the next several days as Middle East producers unveil their September pricing. Traders and refiners in Asia and Europe expect Saudi Arabia to cut its so-called official selling prices, or OSPs, for the first time since the OPEC+ alliance agreed to reduce production in April.
“The OSPs are always important, but especially during times of imbalances in the market,” said Bjornar Tonhaugen, head of oil markets at consultant Rystad Energy. “Saudi Arabia always has its finger on the pulse on customer demand.”
Where the kingdom leads, other Persian Gulf nations almost always follow. Every month Saudi Arabia issues official selling prices, effectively the premium or discount to a benchmark at which it sells crude. Normally, whatever Saudi Arabia does is essentially matched by others in the region. The OSPs then set the tone for the wider physical market, where real barrels change hands. The physical market in turn influences oil futures trading in exchanges in London, New York and elsewhere.
Saudi Aramco, the state oil company, is expected to cut the official selling price for its flagship Arab Light grade by 48 cents a barrel for September sales to Asia, the median estimate in a survey of eight traders and refiners across the region shows. It would be the first drop in four months after a series of hikes that came as OPEC+ cut output and consumption recovered as Asian economies emerged from lockdowns.
While Asia led the world in the demand rebound, crude and product stockpiles remain stubbornly high and the pandemic is still surging or staging a comeback in many countries. Floods and logistical bottlenecks in China in recent weeks have also contributed to a slump in imports, while Indian fuel sales are once again dropping.
September-loading cargoes of Arab Light for Asia could be priced at a 72-cents-a-barrel premium to the average of benchmark Oman and Dubai crude prices, according to the survey. That’s down from a $1.20 premium for August. Saudi Aramco typically releases its official prices in the first five days of the month.
European buyers also said Saudi Arabia will need to lower its OSPs to make the country’s crude competitive. Three said Arab Light would need to drop by about $2 a barrel for supplies into the Mediterranean. It was priced at a premium of 90 cents a barrel to Dated Brent for August, implying a discount for September.
Aramco didn’t immediately respond to an email seeking comment.
The price of spot crude cargoes from Russia to Angola to Brazil has slumped this month after a pull-back in purchases from top importers including China. Refining margins are still well below their average for the time of year in the Asian oil hub of Singapore too, weighing on the ability of processors in the region to turn a profit and pay more for crude.
Other Middle Eastern producers may be forced to cut OSPs as OPEC and its allies such as Russia start to ease output curbs from next month. Global benchmark Brent crude is poised for a fourth straight monthly gain, but August may prove to be more challenging as the increase in supply hits a global economy that’s still far from bringing the virus under control.
(Updates with European trader responses in 9th paragraph.)
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