At first glance it may appear that Saudi Aramco has been a little mean to its Asian customers by raising its oil prices for them while cutting for refiners in Northwest Europe.
But an analysis of moves in official selling prices (OSP) and the underlying crude costs over the past three months shows that what’s happened is the relative discount Asian refiners were receiving has been unwound.
The Saudi Arabian oil giant said Wednesday that it would raise the premium of its benchmark Arab Light grade to Asia to $1.85 a barrel over the Oman/Dubai average for October-loading cargoes from $1.25 in September.
This was above the 50 cent a barrel increase tipped in a Reuters poll ahead of the announcement and is a reversal from the previous month, when the premium was trimmed by 80 cents.
For refiners in Northwest Europe, Saudi Aramco cut the OSP for October-loading Arab Light to a discount of $1.60 a barrel to the Brent weighted average from a 25-cent premium the month before.
However, once you add in the price of the underlying crudes it shows that the good deal for Asia for September-loading cargoes has simply come to end.
On the last trading day of July, the price of Dubai swaps was $101.84 a barrel, and adding in the September Saudi OSP premium of $1.25 gives an approximate cost to Asian refiners of $103.09 a barrel for cargoes this month.
The Brent weighted average ended July at $105.40 a barrel, and adding in the 25-cent premium for the OSP gives a September cargo cost of about $105.65 a barrel.
This means that refiners in Northwest Europe were paying about $2.56 a barrel more than their Asian counterparts for cargoes loading this month.
Using the same formula, but taking the Dubai swaps and Brent weighted average prices for the last trading day of August, and the OSPs announced Wednesday and the difference swings to Asian refiners paying 21 cents more a barrel for October-loading cargoes than those in Europe.
This is far closer to the 45-cent advantage the Europeans enjoyed for August cargoes and shows that the Saudis in general do appear to use the OSPs as a way to compensate for variances in the prices of the underlying crudes.
But the reversal of the discount to Asian refiners does prompt the question; why was it given in the first place?
At the time the OSP was announced last month, the market had been expecting a cut in the premium to Dubai for Asian refiners, and this was duly delivered.
The reasoning at the time was that weak demand was dragging down spot crude prices, and profit margins for making certain products, such as fuel oil, had weakened.
On the crude side, it would seem to be hard to make the argument that the demand outlook has improved in the past month, with China’s economic growth slowing and weakness persisting in Europe.
However, Chinese refiners are expected to boost throughput in September, reversing two months of declines, and the overall crude market has tightened amid ongoing concern over Iran’s standoff with the West over Tehran’s nuclear programme.
Refinery profits in Asia have also improved, with margins at a complex refinery averaging $10.39 a barrel over Dubai crude for August, up from $8.05 and $5.54 the prior two months.
For refiners in Rotterdam margins were $8.06 a barrel over Brent for August, up a little from July’s $7.84 but down from June’s $8.88.
The improvement in margins in Asia has largely been driven by gasoil, with the crack reaching $21.01 a barrel on Aug. 28, the highest in a year. It has risen from $14.18 on May 30, the lowest so far in 2012.
Source: World Oil. All rights received.
