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Aramco Likely to Cut September Crude OSP Amid Contango, Market Weakness

07 August 2020 Raj Rajendran

Saudi Aramco is likely to cut its September official selling price (OSP) to refiners in Asia, a first since May, as output hikes by the OPEC+ group and fresh outbreaks of demand-sapping coronavirus disease 2019 (COVID-19) weigh on prices, pushing some crude oil markets back into contango.

The world's largest crude oil exporter could, based on full-month average forward Dubai prices, reduce its OSP by as little as $0.20-$0.30/bbl for its largest Arab Light grade to term buyers in Asia, but in the last week the marker price fell by as much as $0.80-$0.90/bbl, which is pointing to much weaker fundamentals going forward, trading sources said.

"Things are looking bearish, I think Aramco will veer towards the top end of this range and reduce its OSP by $0.50-$0.60/bbl. This way the other Middle East producers will be able to sell their spot barrels and there won't be much incentive to cheat on their output cuts," said one trading source.

The Saudi Aramco OSP, the first to be announced among Middle East producers, sets the trend for the others including Iraq, Kuwait, Iran and the UAE to follow. In the past few trading sessions spot barrels from the Gulf including Upper Zakum and Basrah Light were hard pressed to find outlets, leading to cuts to differentials, they said.

As a result many expect Aramco to take into consideration the weaker price signals emanating from crude trading in the region in the last week of July as well as the broader market with ICE Brent now in contango.

Last month, the producer raised its August OSP to Asia by a uniform $1.00/bbl across the grades from July, keeping the quality spreads unchanged, according to a price list.

Global crude oil supply will increase from August after the OPEC+ group agreed to loosen curbs by cutting output by a smaller 7.7 million b/d compared with the deeper 9.7 million b/d level that was extended from June to July.

However, this bigger output comes at a precarious time when the rebound in world oil demand is under threat as many nations face a resurgence of COVID-19 including in Australia, Vietnam, the Philippines and Japan.

Others such as India, South Africa, Brazil and the U.S. are grappling with a continued surge in cases while in Europe, a key demand center for Asian jet fuel and diesel, worries of fresh outbreaks are surfacing in the UK and Spain.

The unpredictability and swift spread of COVID-19 has made the demand outlook extremely murky, they said. However, in some major consuming nations such as India and Japan, refiners are already either cutting runs or holding pat on signs that the demand recovery has lost its momentum.

Indian Oil Corp., the nation's largest refiner, will scale back operations to 75% of capacity from as high as 93% in early July, according to local media reports citing its chairman S.M. Vaidya. The lower run ties in with the closing of its 300,000 b/d Paradip refinery for a three-week maintenance from July 25.

Reliance Industries, India's second-largest refiner, brought forward the maintenance of a 380,000 b/d crude unit at its export-oriented 705,200 b/d refinery in the face of declining overseas demand for distillates, trading sources said earlier.

In Japan, crude runs against the country's nameplate 3.52 million b/d capacity are holding at around the 60% mark over the past few weeks, according to Petroleum Association of Japan (PAJ) data even as the state of emergency was lifted amid fresh COVID-19 outbreaks.

"India are cutting runs and the recovery in Japan is not significant, there won't be a big increase in August. Crude purchases will be slow," the trading source said.

Even purchases from the world's largest importer, China, has slowed down, trading sources said, as the nation works to clear hefty crude oil purchases made in the spring that are still clogging its ports, terminals, pipelines and storage tanks. Tankers are even now waiting as many as 10-odd days to discharge their cargo.

China took in a massive 53.18 million mt, or about 12.9 million b/d, in June, easily bypassing the previous record 11.3 million b/d that landed in May, according to preliminary data from the General Administration of Customs (GAC).

July and August deliveries may also end up as new all-time highs as these long-haul cargoes slowly make their way into the Chinese refining system.

Consequently, even grades that typically get good support from Asian refineries, i.e. Middle East medium-sour blends such as Basrah Light and Upper Zakum are struggling even with the reduction in competing July availability of Russian Urals. However, the dynamics will change for August as loading programs show an increase in Urals shipments, traders said.

This, they said, is another reason why many expect Aramco to lean towards a bigger rather than a smaller cut to their September OSP.

Copyright, Oil Price Information Service

Posted 07 August 2020 by Raj Rajendran, Principal Journalist, OPIS, IHS Markit

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