Saudi Arabia plans to increase production of Arab Extra Light crude in coming weeks, which could translate to weaker spot differentials for similar grades in the Middle East, market participants said Friday.
Industry sources had said earlier this month that the production of Arab Extra Light crude was expected to rise by about 200,000 b/d from September, though Saudi Aramco could not immediately be reached for comment.
“[Saudi Aramco’s] October supply volumes [of Arab Extra Light] to term lifters would be increased… or perhaps some term customers may want to lift additional volumes if the incremental cost is lower than what they would have to pay to grab additional [light sour crude] barrels in the spot market,” said a North Asian sour crude trader with knowledge of allocations in Saudi Arabian term crude liftings.
The talk of higher Saudi output emerged soon after Saudi Aramco slashed the September official selling price differentials for its crudes bound for Asian buyers early in the month.
At the start of the month, Aramco cut the OSP of its Arab Light crude loading in September and bound for Asia by $1.30/b, making it the lowest price since January. The September OSP of Asia-bound Arab Super Light crude was cut by 80 cents/b from August and Extra Light by $1.60/b.
Market participants said Aramco’s bigger-than-expected OSP cuts and the planned fourth quarter output increase suggested that the major Middle Eastern producer was stepping up efforts to remain price competitive in order to appeal to Asian end-users and fend off competition from Europe’s North Sea crude suppliers amid a narrowing Brent-Dubai spread.
The second-month Brent/Dubai EFS — which enables holders of ICE Brent futures to exchange their Brent futures position for a forward-month Dubai crude swap — was assessed at $2.58/b Thursday, close to the eight-month low of $2.27/b reached on July 29.
Regional sour crude traders said Saudi Arabia could also be aiming to sell additional barrels in order to make up for any losses in oil revenue incurred due to the recent sharp pullback in international flat prices, with front-month ICE Brent futures tumbling to three-month lows late last month.
“Crude prices around and below $40/b would worry many producers, not just the Saudis,” said a crude trader based in South Asia.
LIGHT SOUR ABU DHABI GRADES UNDER PRESSURE
Regional traders said Saudi Arabia’s plan to increase the production of Arab Extra Light crude later this month, on top of dismal light distillate margins and the narrow Brent-Dubai spread, would likely deter many Asian buyers from Abu Dhabi and Qatari supplies.
Trading has remained thin in Abu Dhabi’s light sour crude market to date, while very little has been heard on pre-tender deals for Qatar’s deodorized field condensate and low sulfur condensate for loading in October, a week before Tasweeq’s tender closes on August 16.
“There are more Arab Extra Light crude [available for Q4],” said a Singapore-based crude and condensate trader, adding: “I think a lot of end-users are rushing to secure incremental Saudi barrels first. After that, focus might just turn to light sour Murban and Qatari condensates, maybe.””Buyers are quiet… it might be a very slow trading month [for Qatari condensates],” said a Tokyo-based crude trader. The gap between offers and buying indications for Qatar’s DFC was very wide, with several North Asian end-users looking to buy October-loading DFC at a premium of around $1/b to Platts front-month Dubai crude oil assessments, while some suppliers were aiming to sell above Dubai plus $1.70/b, he added.
In comparison, most DFC cargoes for loading in September received premiums in the range of $1.70-$1.90/b to Dubai crude last month. The expected increase in the production of Saudi Arab Extra Light crude continued to affect sentiment in the broader light sour crude complex in the Middle East, with end-users across Asia adjusting their buying ideas for Murban and Das Blend lower.
Asked about the near-term price differential outlook for October-loading Murban crude, several traders said the grade could change hands at a discount to Murban’s OSP, indicating that sentiment was deteriorating despite ADNOC’s recent cuts in OSPs.
Four regional traders surveyed by S&P Global Platts last week had tipped Murban to trade at a small premium to the grade’s OSP this month. “Arab Extra Light supply will be the key [factor for Murban’s price outlook] … the narrow [Brent-Dubai] EFS will certainly do some damage, too,” said a Southeast Asian trader.