Top oil exporter Saudi Arabia is expected to raise the price of its flagship Arab Light crude by 20-50 cents a barrel in July, up from a nine-month low in June, a survey of Asian refiners showed. Official selling prices (OSPs) are expected to rise across the board for Saudi crudes sold to Asia in July after OPEC and non-OPEC producers pledged to extend output cuts and as the contango in Middle East crude benchmarks narrowed last month, the survey of six refiners and traders found. A contango market refers to prompt prices that are lower than those in future months, while narrowing contango signals increased demand or tightening supply.
Reflecting higher demand from refiners out of the peak Asian turnaround season, the spread for first and third month cash Dubai prices narrowed in contango in May from a month ago, traders said. “Prices will go up because the Dubai and Oman contango narrowed last month compared with in April,” a source with a North Asian refiner said, adding the extension of OPEC cuts supported the market and could narrow the price difference between heavy and light grades. OPEC and non-members led by Russia decided on May 25 to extend cuts in oil output by nine months to March 2018 as they battle a global glut of crude after seeing prices halve and revenues drop sharply in the past three years. Most of the survey respondents expect Arab Light crude to rise by around 35 cents in July.
The sources polled expected larger hikes in Arab Medium and Arab Heavy amid tightening exports of those grades as Saudi Arabia complies with the output cuts deal by OPEC and non-OPEC producers. Heavier crude grades are also likely to get a boost from firmer fuel oil refining margins. Margins of 180-cst fuel oil averaged -$3.20 per barrel to Dubai crude in May, up from April’s average of -$3.79. The light-heavy price spread is also set to narrow because of weak light distillate refining margins and ample supplies of light crude in the market, traders said. “Naphtha cracks came off a lot. That’s one of the reasons why Arab Extra Light’s (hike is) less,” a second source from another Asian refiner said. Saudi crude OSPs are usually released around the fifth of each month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting more than 12 million barrels per day (bpd) of crude bound for Asia.
State oil giant Saudi Aramco sets its crude prices based on recommendations from customers and after calculating the change in the value of its oil over the past month, based on yields and product prices. Saudi Aramco officials as a matter of policy do not comment on the kingdom’s monthly OSPs.
Source: Reuters (Reporting by Mark Tay, editing by David Evans)